Aluminum in cars dings steel makers

Lighter, stronger products in works

DEARBORN, Mich. - For nearly a century, Ford’s River Rouge factory and its neighboring steel mill have worked in close harmony to produce some of America’s most popular vehicles, from the Model A to the F-150 pickup.

But ever since Ford announced in January that it would make the body of its new F-150 mostly out of aluminum, that steel maker, which was spun off by Ford in 1989, has faced the unsettling prospect that its longtime partner is drifting away.

Automakers’ shift to aluminum has raised apprehension among steel makers, which have been fighting an increasingly uphill battle simply to maintain their business. Now, they are trying to respond, making lighter, stronger steel in a bid to retain one of their most important customers, carmakers.

“The traditional view has been steel or nothing else,” said Saikat Dey, chief executive of Severstal North America, the U.S. subsidiary of Russia’s Severstal Group, which now owns the Rouge steel operations. “I think we all need to accept the reality that we live in a mixed material world.”

Steel makers, which have been riding a wave of prosperity as the economy has recovered, have a lot to lose. Automakers account for about 20 percent of overall annual sales for American steel makers, their second most important source of revenue after the construction business, according to the Steel Marketing Development Institute.

For those companies with historic ties to the auto industry, the loss would be more acute. At Severstal’s Dearborn factory, for example, carmakers including Ford and others account for 70 percent of sales, the company said, though it declined to give specific figures for Ford.

The shift to aluminum is gaining momentum. Automakers are under increasing pressure to meet strict new fuel-economy standards by 2025, and their use of lighter aluminum is expected to double between 2008 and 2025, according to Ducker Worldwide, a research firm in Troy, Mich.

As a result, Severstal sees little choice but to move toward making advanced - and lighter - high-strength steel.

This year, it plans to make a half-million tons more in its Dearborn facility than last year’s run of 2.1 million tons. Part of that demand will come from the F-150, whose frame has increased its use of high-strength steel from 23 percent to 77 percent, a change that will save up to 60 pounds, according to Ford.

“The F-150 is a big turning point,” said Andrew Lane, a metals analyst with Morningstar. “It’s a bold effort by Ford.”

Other steel makers are changing their ways, too. U.S. Steel has invested $400 million in a joint venture with Kobe Steel of Japan to make advanced high-strength steel in a Leipsic, Ohio, factory that is expected to produce 500,000 tons annually.

The consideration by carmakers of using more aluminum is actually opening up opportunities for producers of advanced steel, according to Jody Shaw, manager of automotive technical marketing at U.S. Steel.

“It’s those little changes that they’re willing to accept that’s creating an opportunity,” Shaw said.

Steel makers argue that they still have advantages in price - aluminum can cost as much as three times more - and flexibility, both for the manufacturer and the mechanic who will be fixing the car.

“When you build a mass-produced vehicle, you really need to think about the consequences of the supply chain and repair and insurance costs,” Dey said.

But despite their confidence in some of their advantages, steel makers face an uncertain future, analysts say.

Automakers are scrambling to meet demanding new federal fuel-efficiency standards that will require a fleet-wide average of 54.5 mpg by 2025, a significant change from the roughly 25 mpg that vehicles average today.

When four major steel companies had quarterly earnings calls with analysts last month, “they all said as a constant refrain, ‘Steel remains the material of choice for now,’” Lane said.

“Looking out over the next five years, that could be a different story,” Lane said, adding, “Aluminum is so much lighter, there’s only so much the steel guys can do.”

Until now, automakers largely have tried to meet the fuel-economy mandates with smaller cars as well as slow-selling hybrid and electric vehicles. The challenge lies in continuing to provide the larger, and more profitable, vehicles that buyers want.

Enter the new F-150. All eyes will be on how well the F-150 is embraced and whether a pickup made out of aluminum will be rugged enough in the eyes of consumers. Ford sold 763,402 F-150 pickup trucks last year; it has not given a 2014 sales projection.

This is a battle that has played out before, notably when Audi introduced its mainly aluminum R8 sedan in 2007. Aluminum is also used in smaller quantities by Land Rover, Mercedes, Mazda and Tesla. General Motors uses aluminum in the hoods of its pickups and full-size sport utility vehicles, as well as for components of the Cadillac ATS and CTS and Chevrolet Corvette Stingray. The Detroit automaker said it planned to incorporate more lightweight materials in its next-generation pickup.

“Sometimes there is a push from the aluminum side, and they win over with a particular model, and steel tends to be the comeback kid, with more innovation,” said Felix Schuler, a Munich-based partner in the Boston Consulting Group’s metals and mining practice. Overall, he said, it’sa “healthy race.”

Ford said its new Mustang would have a hood, fenders and other components made of aluminum to reduce weight and improve fuel economy.

Even before the recent interest in aluminum, steel makers confronted a threat from the use of plastic in body panels. The ill-fated Pontiac Fiero in the 1980s, for example, had plastic body panels, which helped save on weight but were not strong or rigid enough.

Aluminum companies are making expensive bets on this future, building plants and reconfiguring factories to meet anticipated demand. So far, these investments are paying off: They are selling out their automotive capacity as fast as they can build it, according to analysts.

Demand from automakers for aluminum is soaring, expected to reach 1 billion pounds this year, up from 200 million in 2012, and to grow by more than 30 percent annually through 2020.

Alcoa, the country’s biggest aluminum producer, is investing about $670 million in its Iowa, Tennessee and Saudi Arabia facilities.

Novelis is investing nearly $550 million to upgrade plants in Oswego, N.Y., and Nachterstedt, Germany, and to build a new factory in Changzhou, China, to triple its capacity from a year ago to 900,000 tons annually. It expects the auto industry to account for 25 percent of its business in two years, up from just 6 percent two years ago.

What seems certain is that ordinary steel is likelier to lose out to its new and improved cousin than to aluminum, Schuler said. Advanced steel materials that are lighter, stronger and cheaper represent a middle ground between the metals.

“It could be in absolute terms one of the most winning materials,” Schuler said of the new steel.

Business, Pages 73 on 03/02/2014

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