CRU Aluminum: The Auto Market Defies Conventional Wisdom

This cycle has plenty of fuel: the war in Ukraine depressing European economic growth, China’s massive Covid lockdowns stunting their growth, and the Fed raising rates aggressively to contain inflation – as seen daily in rising energy, food, and labor costs.

All of this leads us to our focus for this week, how aluminum (and steel) will come through this cycle with respect to automotive, one of their key end markets.

Conventional wisdom would have us believe that high gasoline prices, eye-watering prices for new vehicles, and rising interest rates will stunt automotive demand even before the industry gets over its persistent semiconductor/chip shortage.

The Argument Against Automotive Demand Destruction

Let us consider the retail car and light truck demand environment.

Historically, high gasoline and purchase prices have put off buyers in the car and light truck market. Prospective buyers have chosen to (1) drive their existing vehicles longer, (2) buy used, or (3) lease.

These options are not as attractive as they once were. The average age of the fleet rose 2 months to 12.1 years during 2020. These vehicles are getting more costly to maintain and do not get the fuel economy of current models, making them less able to cope with current high gas prices.

Buying a used car is a challenge. According to iSeeCars, the average used car is now 35% more expensive than it was in 2021, up a staggering $9,080. Inventories are low, and there are anecdotal stories about people being able to trade in late-model cars for new vehicles at what they paid for them 2-3 years ago.

Leasing is not a good deal these days. Financing a purchased vehicle is a slightly better deal than leasing it, according to leading analysts. At the end of the day, people looking for transportation are better off looking at new cars and light trucks.

Now, let us talk about the wholesale or commercial demand environment, namely fleet sales.

We all know the story about how rental fleets sold off their cars during bankruptcy. Anyone who has rented a vehicle recently knows choices are limited and prices are high. The rental companies have NOT replaced those fleets yet. March 2022 sales into large rental fleets were down 19% year on year, offset by strong sales into commercial fleets. As travel ramps up post-pandemic, the rental fleets must come to the market and rebuild.

And auto inventories are at rock bottom. The inventory to sales ratio in February 2022 was 0.47 after hitting 0.37 in February. These levels are bumping along at record lows as recorded by the St. Louis Federal Reserve Bank.

OEMs Want to Raise Build Rates, Aluminum (and Steel) Gear Up to Meet That Demand

The combined retail and wholesale demand environment plus minimal inventory situations argues for auto makers to build more vehicles, assuming they can get components. Current estimates peg 2022 build rates at 15.9-16.6 million units. 2023 build rates could easily surpass 18 million units.

We attended the 12^th International Aluminum Extrusion Technology Exposition in Orlando, Fla., this week. This Expo is held every two years and attracts about 1,300-1,400 attendees. This was the first Expo since 2019, so there was particularly strong traffic.

Extruders have enjoyed stellar growth from automotive demand thanks to the light-weighting trend in both internal combustion and EV vehicles. Estimates from leading equipment manufacturers, aluminum billet producers, and extruders themselves suggest that there are 40 new extrusion presses coming onstream between 2022 and 2024.

Those 40 presses will require about 800 million pounds of additional aluminum billet, and it is estimated that 60% of this demand is earmarked for the automotive sector.

When I asked leading extruders serving automotive about their concerns with automotive demand fading, they smiled and said the dialogue is not what you might think. The number one question coming from automotive Tier 1-2-3 parts buyers has been, “Will you have enough supply for us?” It is definitely not, “We are not sure what we will need.”

Extruders in automotive have learned valuable lessons from aluminum and steel flat-rolled product marketing over the past 10 years. The “field of dreams” approach is dead. No one in extrusions is building press capacity and then venturing out to sell it. Instead, they are adding capacity once the OEMs sign on the dotted line to a firm volume commitment with reasonable price parameters established.

Extruders feel even more empowered by the effects of USMCA and the rules of origin on North American content. The 70% minimum North American content is starting to be enforced, and that is rising to 75% over the next five years. Extruders see parts demand “coming home” from Asia. Some of this is in Mexico and Canada, but US extruders are also getting their fair share.

Fears of demand destruction in light truck and cars now seem premature, and the aluminum sector is poised to raise production to meet it. We suspect the steel segment likes its prospects as well.

Request more information about this topic.

Learn more about CRU’s services at www.crugroup.com