Aluminium sheet market on cusp of big growth

ALUMINIUM giants Alcoa and Novelis spent decades wooing Detroit’s vehicle makers to toss out their heavy steel vehicle bodies and overhaul their factories in order to mass produce vehicles made out of lighter aluminium.

This year, with Ford Motor ’s launch of its new aluminium-intensive F-150 truck, they are finally reaping the benefits of that long campaign, a once-a-generation shift in demand for an industry struggling with weak metal demand.

Their triumphant moment is being marred, however. A handful of up-and-coming rivals are riding their coattails into an industry that could be worth $10bn in a decade.

Since Ford unveiled the truck’s new design, Constellium has announced plans to build a US body sheet plant while Aleris and Wise Metals are considering a foray into the burgeoning US sheet market. To ensure there is a market for their metal, companies are co-ordinating with car makers, although in most cases their identities have not yet been disclosed.

"Novelis and Alcoa are clearly long-term strong players. We believe there is room for (more) players," said the CEO and chairman of Aleris, Steven Demetriou, in an interview.

"We’re one of the top players in Europe in automotive rolled products. We’re looking to duplicate that in the US." Novelis and Alcoa say they are not worried about competition, given how much automotive sheet is needed. It will be several years before rivals start production, and demand may grow 40% over the next decade.

But the rapid shift into automotive sheet illustrates how quickly a hard-fought innovation can spill over and benefit the competition, as the industry struggles with weak margins and overcapacity, especially in the big beverage can market.

"The next 10 years could very well be the best for rolling mills in the industry’s history," said independent analyst Lloyd O’Carroll. Aluminium has made inroads in the automotive industry for decades, as a lighter alternative to steel in wheels, engines and more recently the bonnets of some models.

Lighter vehicles can run on less fuel, stop and start more quickly and haul heavier loads. Audi and other premium car makers have built aluminium bodies for years, but relatively high costs have capped aluminium use in the US. That changed after US President Barack Obama introduced tougher fuel economy standards in 2009. But after decades of on-again, off-again talks with Detroit, aluminium executives were not sure whether car makers were serious about using more of the light metal.

For Alcoa, working with Ford meant re-investing in sidelined research and development, shaking off scepticism after previous disappointments by other car makers and pulling back automotive specialists deployed elsewhere.

One of the biggest breakthroughs came 15 years ago when Alcoa invented an invisible coating called A951, which makes bonds between aluminium parts more durable and longer lasting. "The technology was way ahead of the market," said a 26-year Alcoa veteran and the A951’s co-inventor, Sherri McCleary. But even though A951 is patented, Alcoa does not have the technology to itself. At Ford’s request, it is licensing it to Novelis and other rivals.

Licensing was a trade off. Without it, the F-150 truck may not have happened at all, because Ford needed so much metal, and few firms would voluntarily saddle themselves with a monopoly supplier. But with it, Alcoa has less market power.

"We agreed to meet our customers’ needs, and we think it’s going to benefit us in the long haul," said Alcoa’s commercial vice-president for automotive Michael Murphy.

Automotive aluminium demand in North America is expected to rise 40% to 4.5-million tonnes by 2025, according to a study by Ducker Worldwide. At current aluminium prices, that is worth $10bn and represents just less than 10% of current global consumption.

Margins for automotive body sheet are as high as $600 per tonne, six times more than in beverage can stock, and Alcoa and Novelis say high barriers to entry will protect their hold on the lucrative market for the foreseeable future. "It takes a strong balance sheet to do this (and) our relationships with customers are important," Novelis CEO Phil Martens said.

But rivals are moving quickly, and Constellium and Aleris are touting their European expertise. Last month, Dutch-based Constellium, counting Volkswagen among its customers, sealed a joint venture with Japan’s UACJ to produce automotive sheet in Kentucky, from 2016.

Aleris, which supplies Audi and Mercedes from its Belgian rolling mill, is in the "final stages" of a study looking into starting US body sheet production, Mr Demetriou said.

Both would compete with Alcoa’s new line in Iowa, US, and Novelis’ recently commissioned lines in New York. Alcoa is also adding capacity in Tennessee and Novelis has another line coming at Oswego in New York.

Smaller players with less financial clout and no automotive experience may enter the fray in lower-risk supply deals.

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