Rusal Shock Delivers Body Blow to Aluminum in Fight With Steel

(Bloomberg) -- For decades, aluminum has been fighting an epic battle to take away steel’s dominance in the auto industry.

Soaring demand for more fuel-efficient vehicles has helped the lighter metal add market share -- in spite of its higher cost. But aluminum’s recent gains came under threat this month from the supply shock inflicted by U.S. sanctions against United Co. Rusal.

“We as an industry have to think about how we resolve this problem where we can be squeezed so fast by a single source,” said Rob Van Gils, chief executive officer of Hammerer Aluminium Industries Holding Gmbh, which extrudes aluminum for automakers. “The risk is that in cases where there’s close competition between aluminum and steel, buyers would say we should choose steel because it’s more reliable in supply, it’s more reliable in price."

Metals markets were thrown into turmoil by the sanctions on Rusal, the biggest aluminum maker outside China. Aluminum surged to a six-year high, while producers scrambled to find supplies of alumina, the key raw material that Rusal makes in Ireland and Jamaica. The U.S. decision to ease the punitive measures has given the industry some breathing room, but chronic alumina shortages still threaten production.

“The supply chain is greatly exposed to risks,” Eoin Dinsmore, a consultant at CRU Group, said at the company’s World Aluminum Conference in London Tuesday. “If BMW had to shut down their line, if carmakers weren’t able to get their product, that’s not something that can be easily undone. You don’t recover from the damage that does.”

Automobile making is the main industry where steel and aluminum compete head to head, and for years, steel has been losing share in the market where it makes most of its money. While steel parts are stronger and cheaper than aluminum, they’re heavier. Manufacturers want lighter vehicles that pollute less.

While aluminum accounts for just 400 pounds in an average car -- compared with about 2,000 pounds for steel -- that share has been growing. By 2020, more frames will be made of the lightweight metal, boosting its average to about 465 pounds, according to Drucker Worldwide, an auto-industry researcher based in Troy, Michigan.

In spite of aluminum’s gains, carmakers remain very price sensitive, said Will Savage, business development director at Liberty Aluminum Group. “Anything that allows them to worry about the cost of our material is damaging to us,” he said at the conference.

A pullback from aluminum wouldn’t be discernible instantaneously. Automakers decide on the material for a vehicle about three years before the first car rolls off the assembly line.

"As an industry, we need to make sure we can convince them that aluminum is still the right choice," Van Gils said.

To contact the reporters on this story: Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net, Mark Burton in London at mburton51@bloomberg.net.

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Alex Devine, Tony Barrett

©2018 Bloomberg L.P.