Gearing up for aluminum: Beyond the F-150 hoopla, a rocky road

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When the latest version of the Ford F-150 pickup truck rolled off the assembly line this week in Dearborn, Mich., investors were clearly relieved.

Ford Motor Co. shares rallied for three consecutive days on the hope that the new version of the venerable pickup, the first mass-produced vehicle made with an aluminum body, will capture the imagination of consumers attracted to a lighter, more fuel-efficient vehicle.

But will the cheering last?

There is a fascinating theme at work here: If the F-150 succeeds, Ford will likely make more vehicles out of aluminum as it moves away from traditional steel bodies.

More importantly, other car manufacturers will probably make a similar transition, giving car manufacturing a radical makeover and handing an attractive market to aluminum producers.

The potential for investors is huge if everything unfolds smoothly, but this is a remarkably complex shift that makes it a risky investment for sure.

The move toward aluminum in car production has been an evolving process in recent decades.

According to Ducker Worldwide, a consultancy, the use of aluminum in light vehicles – in parts, doors and closures – has risen from an average of about 45 kilograms a vehicle in 1977 to 159 kg in 2013.

They expect the amount to rise to 179 kg in 2015, or about three billion kg in total, marking the start of an "explosive period of growth" over the subsequent decade, as the amount of aluminum used rises another 40 per cent over that period.

The reason? Car manufacturers, particularly in North America, are trying to shed weight in order to hit government-mandated fuel-efficiency targets.

In the case of the F-150, the shift to an aluminum body will cut the vehicle's weight by more than 300 kg and boost fuel efficiency by as much as 20 per cent.

You can see the bullish case here: Consumers fall in love with the new pickup, Ford basks in the glory of its bold move and aluminum producers respond to stronger demand for its metal.

It's a persuasive case that has already given a significant lift to Alcoa Inc. The shares have doubled over the past year, ending a years-long slump when the aluminum industry wrestled with low prices and overcapacity.

For auto makers such as Ford, though, the impact is harder to see: Despite recent gains, the share price has slumped 16 per cent since July and is slightly underwater for the year.

The likely explanation is that investors see rising demand for aluminum as a sure thing, but are less confident in the abilities of Ford to spin a profit from the new vehicles or maintain a competitive edge if other manufacturers follow its lead.

Indeed, for all the hoopla over the new F-150, investors have good reason to be worried. The new version costs more to produce and U.S. auto sales have already recovered to levels seen before the financial crisis, making the cycle look a bit old.

Manufacturing hiccups – this is no easy transition – could also upset Ford's profit in the short-term, given that the pickup truck is a huge source of Ford's profits.

Still, there are opportunities here.

In the case of Alcoa, the share price is stirring from a very low level. Even with the recent rebound, the price is 60 per cent below its high in 2007 and merely back to where it was in 1998, suggesting room to grow if the aluminum market expands according to plan.

In the case of Ford, the shares hardly reflect overconfidence in the transformation ahead. They trade at less than nine times trailing earnings and yield an attractive 3.4 per cent following aggressive dividend hikes over the past two years.

The move to aluminum is bound to be rocky for auto makers and aluminum producers, given the uncertainties ahead. Investors should expect a similar ride.