As automotive companies shift to using more aluminum, the time could be right to invest in the metal.
Aluminum looks set to continue its comeback this year as automotive companies increasingly turn to the metal over traditional steel.
Ford (NYSE:F), Jaguar and Toyota (TSE:7203) have all made high-profile switches to using the metal in vehicle production, while marine companies are forecasting greater demand for aluminum-built liquefied natural gas (LNG) carriers.
Time for a turnaround
Aluminum prices have dropped over the past few years because of an excess of global production, according to Bloomberg, but a projected deficit is helping the price gather pace. Indeed, in a recent Reuters poll, seven out of 14 analysts predicted an aluminum market deficit for 2015 — encouraging news given the fact that the global aluminum market has been in a surplus for nine years.
Prompting the reversal is the fact that some companies, like Rusal (HKEX:0486) and Alcoa (NYSE:AA), have cut aluminum production in an effort to correct what has been a market saturated with product. As a result, the metal has been on a steady increase this year, and is currently hovering at $0.88 a pound. It’s up about 10 percent for the year and in August reached an 18-month high on the back of speculation of rising demand and US economy growth.
What’s driving the increase?
As mentioned, it’s the fact that the metal has been tapped for use in new car models — as well as in the production of ships that carry LNG — that is helping boost its price.
Ford announced in August that its F-150 model will be produced with more aluminum, a move that will shave roughly 700 pounds from the F-150 and boost its fuel economy by an average of 7 miles per gallon. The metal already makes up about 75 percent of the Jaguar XE sedan’s components.
The latest in the line of automotive companies to make the switch is Toyota, which is going to be using aluminum in the production of hoods for its Camry. Speaking to AutoNews, spokeswoman Jana Hartline said: “Toyota has plans to use aluminum on future vehicles for hood, closures and parts for lightweighting.”
The reason behind the switch is a desire to better meet corporate average fuel economy regulations. A lighter car theoretically would have better fuel efficiency and therefore meet stricter fuel emissions laws. In all, aluminum demand is expected to double in the auto industry by 2025.
Not only car companies are looking to use the lightweight metal for production. Aluminum is also widely used in the marine industry due to its resistance to corrosion and fuel efficiency, and companies are boosting aluminum output accordingly.
For instance, UACJ (TSE:5741), the world’s third-largest producer of rolled aluminum products, is expanding its capacity for sheets to be used in LNG carriers by 50 percent to meet rising tanker demand.
In an interview with Bloomberg, Hiroshi Hashimoto, a senior analyst at the Institute of Energy Economics, called the demand “unprecedented” and said the Asian country will need more than 20 new LNG carriers.
The time is right
Reuters has warned investors that the aluminum deficit may be short lived due to potential Chinese stockpiles, which, if released, will likely bring the metal’s price down. However, given that the size of any potential stockpile in China is unknown, the potential for higher aluminum prices remains.
Similarly, FastMarkets recently cautioned investors to move quickly to take advantage of favorable prices. That said, it estimates that the price of aluminum will hit an average of $1,900 by the end of 2014, up from roughly $1,800 at the end of 2013.
Securities Disclosure: I, Nick Wells, hold no direct investment interest in any company mentioned in this article.