Alcoa: The Biggest Winner From The Aluminum Ford F150

| About: Alcoa, Inc. (AA)


The 2015 Ford F150 will be the first all aluminum pickup truck.

This signals a fundamental shift towards aluminum in the automotive industry.

While automakers take on risk in new manufacturing techniques, aluminum suppliers just get more business.

The 2015 Ford (NYSE:F) F150 will be built largely of aluminum for the first time in its history. This has allowed Ford to shed over 700 pounds from the truck compared to the 2014 model. Reduced weight will result in significantly improved gas mileage as the automaker tries to stay ahead of the ever-tightening CAFE (corporate average fuel economy) standards. The gas mileage of the F150 has a huge impact on Ford's CAFE rating because F-Series has been the best-selling vehicle in the United States for the last 32 years in a row. Last year Ford sold over 760,000 F-Series trucks. This means Ford must improve the F150's gas mileage if it wants to avoid violating CAFE standards. The 2014 CAFE requirement for trucks dictates an EPA window sticker rating of 18 mpg. This number increases by nearly 30% over the next decade to 23 mpg.

Not only is an all aluminum pickup a first for Ford, it is a first for the auto industry as a whole. No other company has an aluminum body pickup truck anywhere close to production ready. As the F-Series is the best-selling vehicle in America, it is always being chased by the competition. Now the race is on as the other manufacturers rush to develop an aluminum bodied truck. Current estimates put the other automakers approximately two and a half years away from having an aluminum truck ready for production. What this means is there will be a huge increase in demand for aluminum over the next several years.

Ford has inked deals with Alcoa (NYSE:AA) and Novelis (part of the Aditya Birla Group) to supply aluminum for the new F150. Many sources say these deals account for most of the automotive aluminum sheet that will be available for the next few years. This means that as other major automakers, including General Motors (NYSE:GM) and Chrysler, rush to ink deals with aluminum suppliers, they will have to compete for the remaining supplies. We all know what increased demand and limited supplies will lead to: higher prices. Automotive grade aluminum will not only be consumed in much larger quantities than it ever has, it will be purchased at higher prices as companies are essentially forced to use it by the higher gas mileage requirements.

So while Ford will clearly benefit from being ahead of the competition in aluminum production and securing a steady supply of raw materials, Alcoa and other automotive aluminum suppliers will likely be the biggest winners from this industry shift. Ford incurs a degree of risk by being ahead of the competition. No one has ever produced cars in this volume using aluminum, no one knows what problems they might encounter. Ford is shutting down its assembly plant for 13 weeks to retool for 2015 F150. That is an entire quarter of lost production. Other automakers will have the benefit of learning from Ford's issues, but will have more trouble acquiring aluminum. Alcoa does not have any of this risk; they just have to sit back and supply the automakers as they rush to learn this new material.

This trend from steel to aluminum, although starting with pickup trucks, will continue to cars as well over the long term. The tightening CAFE standards are much more strict for cars than they are for trucks. Where the standards for trucks dictate a nearly 30% increase in MPG, the standards for both small and large cars dictate an improvement of more than 50%. Small cars must increase from 28 mpg to 43 mpg and large cars must increase from 22 mpg to 34 mpg by 2025. These very strict standards will force automakers to apply all available technologies to make their vehicles more efficient, including broad use of aluminum to reduce weight. When cars inevitably move towards all aluminum construction, it will drive an even larger increase in the demand for aluminum than the current scramble towards aluminum trucks. So far this year pickup trucks (despite being some of the best-selling models) have made up just 13.5% of total passenger vehicle sales according to the Wall Street Journal.

So while Ford has done well to get out ahead of the competition with an all aluminum pickup, the bigger message to take away is that this marks a fundamental shift in the US automotive industry, aluminum is coming and it cannot be stopped. While automakers take on some risk by adopting aluminum because they need to update their manufacturing and teach repair shops how to deal with aluminum, the aluminum suppliers, like Alcoa, have no risk. I see the aluminum industry as a whole growing significantly over the next decade or two driven by this fundamental shift in the car industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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