Excell with Options: Will labor unions drive change in the aluminum market?
Executive summary
In his most recent report, given the increasing presence of aluminum in auto production, Rich Excell explores how contract renegotiations at major auto companies could be a possible market catalyst.
One of the biggest stories of 2023 has been the negotiation for higher wages by unions. The airlines have seen this across all workers – pilots, flight attendants, and mechanics. We have seen it in rail and trucking. We have seen it with the West Coast dock workers. The latest, and arguably biggest, negotiation to take place is between the United Automobile, Aerospace, and Agricultural Workers of America (UAW) and the Big Three auto manufacturer companies – Ford Motor Company, General Motors, and Stellantis (formerly Chrysler).
Contracts are coming to an end and the UAW wants to renegotiate these deals having seen the success of other unions in getting higher wages for their workers. The first of the Big Three contracts are set to expire on September 14 and a shutdown across all automobile manufacturers has been suggested as a possibility and a negotiating tactic.
Image 1: Amount of aluminum per vehicle
If there is a shutdown among automobile manufacturers, what markets might be the most affected? Traditionally, one might suggest that steel makers would be, or semiconductor chips, given the large number of chips that now go into an automobile or light trucks. However, quietly, one of the bigger inputs for light vehicles in the U.S. has become aluminum, making up 12% or more of a car. When Ford switched to making the F-150 out of aluminum in 2015, it was clear that this metal had become a critical input to even the most popular trucks on the market.
Given the need for all automobile manufacturers to drive higher their corporate average fuel economy (I) standards, producing cars, and light trucks out of the lighter aluminum has become a critical factor to success. Thus, I believe traders in the aluminum market should pay close attention to the impending UAW contract negotiations.
Aluminum Association headline on electric vehicles
In The Aluminum Association’s article “New Survey of Automakers Confirms Aluminum Use Expected to Grow in New Electric Vehicles” published in April, they highlight the growing importance of aluminum as the industry shifts its production to more electric vehicles.
In the article, the AA quoted Abey Abraham, Principal of Automotive and Materials at Ducker Carlisle, saying: “Electrification positively affects aluminum content and compensates for the transition away from powertrain and transmission components, which are primarily aluminum.” She went onto state that “as electrified powertrains create significant growth opportunities for aluminum, more stringent fuel economy standards also continue to promote mass reduction in ICE vehicles.”
The success of the aluminum industry appears to be tied ever-more-closely to the success of the automobile industry overall.
Image 2: Overlay of the generic front month aluminum future and the U.S. auto sales total
I can see from the overlay of U.S. automobile sales total demand and the generic front month aluminum contract that the relationship has gotten tighter over the last several years than it was previously. I can also tell that the automobile demand leads Aluminum futures on the upside as well as the downside. For now, automobile sales have held up relatively well; perhaps as automobile makers are churning out newer product ahead of any potential shutdown. However, if this automobile sales number (line in white) were to fall precipitously from an automobile strike the way we saw it fall in 2008 and in 2020 for other reasons, do we think there is a risk that Aluminum futures might face the same fate?
Image 3: Chart of generic front month Aluminum futures and generic front month Natural Gas futures
One of the major inputs in the manufacturing of aluminum is the energy source, typically natural gas. If I plot the front month futures of natural gas and aluminum the last five years, I can see that the two tend to move in tandem. Lately, there has been a decoupling with natural gas prices having fallen more than aluminum. Could this be the natural gas market sensing the potential oversupply of natural gas since a key market like automobiles, and therefore aluminum, may be facing a possible manufacturing shutdown? There are other factors, but we shouldn’t ignore that a key input to the process is giving a signal that demand may not be as strong as the other economic data could suggest.