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September 1, 2005

Speed Demons

Automotive industry growth may be stuck in first gear, but metals suppliers still could see revved-up demand.

All metals companies carefully follow the automotive industry’s fortunes. And no wonder, what with North American annual revenues of $336 billion. In 2004, the U.S. automotive industry alone used 13.9 million tons of steel, accounting for 12% of domestic steel consumption, a decline from 2003 when the auto industry consumed 15.9 million tons or 15% of the nation’s total. Meanwhile, U.S. automakers were responsible for 31% of the nation’s aluminum consumption, the highest level on record.

Metals executives know only too well that demand for motor vehicles can fluctuate precariously, based on a hard-to-predict matrix of consumer preferences, global economic conditions and government regulations. Together these factors drive demand for autos, their features and the various materials used in their manufacture.

Forecasters predict two things: plodding growth in the number of vehicles sold each year, but a potentially greater use of metals because of a continued consumer preferences for light trucks and greater fuel efficiency and thus lighter vehicles. The latter factor could prompt automakers to switch from off-the-shelf steel to higher-margin, high-tech metals for future car designs. That’s the big picture, at least. For a more granular view of metals demand within the auto sector, several often countervailing trends bear examination.

SLOW BUT STEADY
Let’s start with overall demand. R.L. Polk, a Southfield, Michigan-based research company, predicts light vehicles in operation (cars and light trucks, including SUVs) will grow from the current 220.9 million to 234.4 million, or an increase of 6.1% between now and 2008. But the mix of cars vs. light trucks will continue to diverge. Here Polk says that between 2004 and 2008, the light truck vehicles in operation will increase by 13%, while passenger car vehicles in operation will drop by 9%, an ongoing trend. In 2003, light trucks represented 40% of vehicles in operation and passenger cars 60%.

Polk’s forecasts are especially significant, because the overall number of vehicles in operation affects new car production, which currently is running at 16 million vehicles in North America. What’s more, the increasing popularity of light trucks makes predictions somewhat tricky, as light trucks tend to last longer than passenger cars. The so-called scrappage rate of vehicles in 2004 dropped to levels not seen since 1993, according to Polk research. Meanwhile, the median age of passenger cars, the firm reports, increased to nearly 9 years.

So what does that mean for new car demand? Efraim Levy, automotive analyst at Standard & Poor’s, predicts that new car production should continue to increase by about 1% annually from its 2004 levels. “There’s already more than one car per registered driver in this country,” Levy says.

Executives in the auto industry hold a more optimistic view. Jim Press, executive vice president and COO of Toyota Motor Sales, USA, believes that U.S. demand could climb by 3 million units, higher than ever before. He has called this era a “Golden Age” for the auto industry, citing demographic trends of increasing age and affluence of Americans, the addition of 20 million new Generation Y drivers by 2010, and the growth of multi-car families.

EMPLOYEE PRICING 
This summer’s auto sales figures paint a rosy picture of industry growth prospects. Smith Barney research reports that June new-vehicle registrations increased by 16%, due largely to publically offered employee discounts and other incentives. But this increase could be an aberration, because some experts believe it only represents a change in the timing of new car sales.

Indeed, Farmington Hills, Michigan, forecasters at CSM Worldwide see 2005 U.S. new-car sales unchanged at approximately 16.95 million units.

“For people who do want a new car, a financing offer will tip the scale in favor of making a purchase,” says Julia Cardis, consumer market analyst at Mintel International Group, a Chicago-based market research firm. Nevertheless, the discounts are expected to have minimal long-term impact in the automobile buying habits of consumers. Mintel’s June 2005 survey showed that more than twice as many individuals said they bought a new car because they were “tired of their old car” than those who bought a car because there was a great financing offer.

High inventory levels, of course, sparked the discounts, and prompted some automakers to examine other ways to clear out their unsold vehicles. “We had seen several scheduled cutbacks due to high inventories,” says Ron Krupitzer, senior director, AISI Automotive Applications at the American Iron and Steel Institute (AISI). “Inventories have been high and we expect the discounts will consume any pent-up demand.”

BIG DEMAND
Even if demand for new vehicles subsides, the AISI still is confident about the industry’s need for steel going forward. And the group is especially optimistic that the ratio of light trucks to passenger cars will remain at about 50% despite high fuel costs. The U.S. Environmental Protection Agency says sales of light trucks, which include SUVs, in 2004 comprised 48% of the light-duty vehicle market—twice the 1984 market share of this segment.

While high fuel prices have spawned a backlash against the gas-guzzlers of the 1990s, the long-term trend favoring more trucks on the road should give steel and aluminum producers reason to honk their horns.

The changing mix of the vehicle fleet in the United States has weighed on demand for metals—literally. The EPA estimates that the 2004 fleet is 26% heavier than the average fleet was during 1987, because trucks generally are bigger and use more metals than passenger cars.

LIGHTER CARS
Again, rising energy prices could cause consumers to shun elephantine SUVs in favor of lighter, more fuel-efficient vehicles. But that scenario still could favor metals producers because leaner cars will require high-tech, high-margin metals to shed their pounds. “We are looking at future applications of lightweight materials to improve fuel economy,” says Mark Chernoby, vice president of advanced vehicle engineering at DaimlerChrystler. “We use high-strength steel which will be a key enabler in our toolkit to help us reduce weight and improve efficiency.”

AISI’s Krupitzer agrees: “Over the past three years, the automobile industry has begun shifting from mild steel to high-strength and advanced high-strength steels,” he says “Making vehicles lighter is an important factor.” Now the average vehicle sports 15% to 20% of the newly formulated steel (see chart below).

Ford has labored to develop new manufacturing processes such as stamping, trimming and sheeting that can accommodate the different properties of the new materials. “Going from 1-millimeter-thick steel to 0.9-millimeter steel allows us to save weight and optimize body structure while maintaining structural integrity,” says Matt Zaluzec, manager of materials research and advanced engineering at the Ford Research and Advanced Engineering Group. “There’s a general trend to put more and more high-strength steel into the body-in-white, or the unpainted and untrimmed upper body structures. Right now, the industry is at about 25% to 30% of body-in-white high-strength steel. We would love to get to 50% in the very near future,” Zaluzec says.

ALUMINUM TRENDS
Aluminum, which is about half the weight of steel, likewise is increasingly critical to an industry concerned with weight, performance and safety. One pound of aluminum replaces two pounds of steel in automotive applications, says The Aluminum Association Inc.

Aluminum content is up sharply (61%) from 10 years ago when the average vehicle contained 140 lbs of the material. Experts say the aluminum content in automobiles will continue to grow over the next decade, although more slowly, increasing from 225 lbs per average vehicle to 287 lbs, representing a 27.5% increase, according to Ducker Research.

“Aluminum can be used to maintain or even increase the size and strength of a vehicle’s critical front- and back-end crumple zones without increasing overall weight. Also aluminum space-frame technology allows a car to accelerate faster, stop quicker and turn faster,” says Kevin Lowery, spokesman for Alcoa.

Aluminum now makes up 60% of the wheel market, and the industry is finding new applications in hoods, trunk lids, fenders, heat shields, chassis and suspensions, says Thomas P. Gannon, vice president of specialty products at the Alcan spinoff Novelis Inc., headquartered in Atlanta.

Ford’s Matt Zaluzec is proud of the engineering behind the Jaguar XJ, the world’s first aluminum car. “Jaguar is in the lead on advanced aluminum body structure,” Zaluzec says. The material allowed for a 45% body-in-white weight reduction. “We replaced steel with aluminum sheet, but we are using a type of aluminum that has the same mechanical properties as steel, so you cannot tell the difference in crash testing.”

Just as with new high-strength steels, advanced aluminum requires a change from traditional production processes. “This aluminum trims differently, so we had to use glue and stainless steel rivets to piece the body structure together,” Zaluzec says. The technique improves the structural rigidity of the completed frame.

Aluminum and other new materials also are a big component of Chrysler’s ME 412, a sleek prototype on the cutting edge of advanced materials use. “The body of this car is a carbon fiber honeycombed over aluminum,” says Chernoby. It has outstanding vehicle rigidity with an ultra light design—the car weighs only 2,900 lbs. The ME 412 also has an all-aluminum, good-turbo, 6.0-liter V12 engine.”

Other trends—for example, the increasing popularity of alternative technologies, such as hybrids and fuel cells—affect the demand for additional new materials. The new alloys, polymers and the efficient use of precious metals will be ongoing challenges that a company shifts in propulsion technology, Chernoby says. “The hydrogen fuel cell system in our F-Cell passenger car incorporates many advanced material technologies, including being supported in an aluminum cradle,” he says.

NON-TRADITIONAL MATERIALS
Automakers and consumers are excited about other emerging technologies, such as magnesium and composite material. Quiet Steel, a layer of plastic overlaid on and sandwiched between layers of metal, is designed specifically to reduce noise, vibration and harshness (NVH). Reducing NVH can actually lower the weight of the vehicle by eliminating the need for excess sound damping material such as rubber pads, foams and so forth.

While advanced metals continue to make inroads into new cars, metals suppliers so far have little to fear from a competing material that has plagued them in other markets, namely plastics. Futurists (and journalists) may look longingly at models such as the $440,000 Carerra GT road car, which has a carbon fiber single shell, bodywork and engine cradle. However, the sky-high costs of such materials will keep them out of typical family cars for some time to come. Carbon fiber reinforced plastic can cost up to $15.75 per lb, compared with $3.15 per lb for aluminum.

PRICE SENSITIVITY
Especially for the everyday motor vehicle buyer, cost will remain a huge issue—enough so that it could temper the use of plastics, high-tech steel and even aluminum. “After years in which price increases outstripped income growth, heightened competition, consumer demand for affordability, currency fluctuations and cost cutting by manufacturers have kept a lid on automotive prices”, said S&P’s Efraim Levy in a June 2005 report. And in the case of increasing prices of materials and components, “auto manufacturers have been unable to pass on these higher costs to consumers.” In fact, the cost of vehicles relative to the average income has been declining.

GM’s Saturn division offers a telling example. Saturn designers pulled back on the use of plastic body panels, instead using only steel in the manufacture of the 2005 Relay minivan. Some believe the move stemmed from GM’s desire to lure the once-independent division back into the fold. However, the choice of steel over plastic also was a cost issue. Steel is cheaper for higher volume runs, while molding plastic panels can be less expensive than the price tag for stamping dies when production runs up to 80,000 units annually.

Pricier aluminum suffers from the same pressures. It is more expensive than steel, and less cost-efficient for high-volume models. “We use aluminum in intermediate volume runs (30,000 to 60,000 units),” Ford’s Zaluzec says.

NEVER A STRAIGHT SHOT
Accurately predicting the automobile industry’s demand for metals gets even tougher when you factor in the China wild card. Last November, China’s demand for steel forced Nissan to cut back production due to resulting shortages. During that time, Toyota reduced procurement for its cars from 610 types of steel to 500. The shortage may be only temporary, however. Some analysts expect China’s expanding raw materials industry will allow it to become self-sufficient in the near future.

Fuel-efficiency standards represent yet another wild card. National Highway Traffic and Safety Administration may soon restructure the Corporate Average Fuel Economy (CAFE) standards for light trucks, which currently segment the market by weight of vehicle. Novelis’s Thomas Gannon believes, “that almost certainly will affect the future design of SUVs, pickups and minivans—and may ultimately affect passenger car design as well.”

The bottom line for metals companies trying to get a handle on product demand is pretty simple: Strap yourselves in tight and keep your eyes on the road.

MOTOR VEHICLE PRODUCTION FORECAST
 
Design Parent 2004 2005 2006 2007 2008 2009 2010 2011
North America BMW 143,916 131,651 120,272 150,912 188,555 196,356 224,954 213,789
DaimlerChrysler 2,673,404 2,671,853 2,755,819 2,888,614 2,868,026 2,831,170 2,793,866 2,702,884
Ford 3,604,901 3,526,688 3,443,356 3,497,270 3,546,537 3,475,798 3,310,675 3,112,058
Fuji Heavy 105,550 121,085 143,711 169,470 188,561 176,165 183,306 191,285
General Motors 5,109,126 4,681,937 4,743,609 4,856,427 4,906,943 4,800,040 4,801,843 4,792,268
Honda 1,217,755 1,384,506 1,438,430 1,491,558 1,559,378 1,585,161 1,597,827 1,604,281
Hyundai 0 83,288 248,160 298,710 289,860 272,711 390,191 506,797
Mitsubishi 113,435 80,531 74,648 60,770 26,411 0 0 0
Renault/Nissan 1,073,975 1,168,310 1,142,432 1,257,065 1,298,495 1,367,758 1,332,622 1,330,062
Suzuki 4,569 0 0 0 0 0 0 0
Toyota 1,512,914 1,566,401 1,551,084 1,779,794 1,940,503 2,051,727 2,059,644 2,062,211
Volkswagen 225,342 325,851 383,776 351,331 307,403 264,868 245,625 230,239
Total 15,784,887 15,742,101 16,045,297 16,801,921 17,120,672 17,021,754 16,940,553 16,745,874

Source: CSM Worldwide Q2 2005