{"id":25190,"date":"2017-11-15T19:23:15","date_gmt":"2017-11-16T00:23:15","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/ford-motor-company-faces-steel-aluminum-supply-price-headwinds\/"},"modified":"2017-11-15T19:23:15","modified_gmt":"2017-11-16T00:23:15","slug":"ford-motor-company-faces-steel-aluminum-supply-price-headwinds","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/ford-motor-company-faces-steel-aluminum-supply-price-headwinds\/","title":{"rendered":"Ford Motor Company Faces Steel & Aluminum Supply Price Headwinds"},"content":{"rendered":"

In February 2017, the Chinese Ministry of Environmental Protection passed regulation forcing steel and aluminum companies to reduce production by as much as 30% during winter to combat the country\u2019s increasing pollution problem[1]<\/a>. Experts believe that the mandated curtailments will equate to annual declines in Chinese production of steel and aluminum of ~8% and ~17%, or ~4% and ~6% of global supply, respectively[2]<\/a>[3]<\/a>[4]<\/a>. Given the globe\u2019s dependency on China produced metals, these reductions have led to upward price swings for both metals, as evidenced by year-over-year 20%+ increases in aluminum spot price contracts[5]<\/a>. Unfortunately, on a short-term basis, due to the Ford Motor Company\u2019s policy against hedging any steel procurement, and very limited aluminum, this increase in cost will be a near-term obstacle to profitability as both metals make up its highest commodity cost[6]<\/a>. In fact, this pass-through of increased costs is already being evidenced in the Company\u2019s forward-looking estimates, which highlight commodity costs will be a $1.2bn headwind on profitability for the FY2017[7]<\/a>. However, on a longer-term horizon, China\u2019s awakening to its pollution problem only represents the latest pin to drop in the world and signals a need for Ford to consider alternatives to steel and aluminum-bodied vehicles which will experience the brunt of a global reduction in coal-burning activities.<\/p>\n

Fortunately, the Company\u2019s management understands the concern over global warming will negatively impact their business. These concerns are what prompted the introduction of the aluminum-bodied F150 in 2015, an effort to utilize lighter weight metal and thus lower overall gas consumption[8]<\/a>. Management has confirmed that, in the near-term, they will continue to use aluminum in the F-series truck line to fully capitalize on the emission benefits of lighter vehicles. At the same time, Ford has created a long-term partnership with DowAksa, a joint venture between Dow and the acrylic specialist Aksa, to further research into carbon fiber as a viable alternative to steel and aluminum auto parts[9]<\/a>. To date, carbon fiber has shown promise as an alternative to metallic auto parts, but its high cost has limited its use to performance-based applications. If Ford and DowAska can find a cheaper production process for carbon fiber, Ford may be able to curb their dependency on steel and aluminum.<\/p>\n

In addition to the actions management are taking, I think there are a few other options for Ford. The first is they should consider entering into hedging contracts for both steel and aluminum. To me, entering into these hedging contracts will add stability to your largest volume commodities during a time in which production in China is coming under scrutiny for reasons beyond pollution[10]<\/a>. Any technological breakthrough on the carbon fiber appears to be years away, so ensuring a constant supply price for steel and aluminum is paramount. The second piece of advice I would give management is that they should continue to bring more aluminum-bodied vehicles to market due to innovation in aluminum production. For instance, Norsk Hydro, a Norwegian-based aluminum producer, is pioneering hydro technology to bring the aluminum production life-cycle to carbon neutrality, or an ~80% reduction in carbon emissions, by 2020[11]<\/a>[12]<\/a>. Beyond the ethical benefits of lower emissions due to lighter cars, I believe aluminum is the future for Ford because new technologies are coming online that will make aluminum a more sustainable metal for years to come.<\/p>\n

However, questions remain whether the Company can, or must, move away from metallic-based vehicles. For instance, are consumers willing to accept a portion of the cost of producing carbon fiber-bodied vehicles, thus shortening Ford\u2019s window to market with such products? Additionally, are China\u2019s curtailments a temporary blip and the country will return to previous production levels despite the pollution ramifications?<\/p>\n

(800 words)<\/p>\n

[1]<\/a> Lian, Ruby, and Melanie Burton. \u201cChina orders aluminum, steel cuts in war on smog.\u201d Reuters, Thomson Reuters, 1 Mar. 2017, www.reuters.com\/article\/us-china-pollution\/china-orders-aluminum-steel-cuts-in-war-on-smog-idUSKBN1683G6.<\/p>\n

[2]<\/a> Lian, Ruby, and Melanie Burton. \u201cChina orders aluminum, steel cuts in war on smog.\u201d Reuters, Thomson Reuters, 1 Mar. 2017, www.reuters.com\/article\/us-china-pollution\/china-orders-aluminum-steel-cuts-in-war-on-smog-idUSKBN1683G6.<\/p>\n

[3]<\/a> Sawe, Benjamin Elisha. \u201cTop 10 Steel Producing Countries In The World.\u201d WorldAtlas, 8 Aug. 2016, www.worldatlas.com\/articles\/the-top-10-steel-producing-countries-in-the-world.html.<\/p>\n

[4]<\/a> \u201c8 Top Aluminum-Producing Countries.\u201d Investing News Network, 20 Mar. 2017, investingnews.com\/daily\/resource-investing\/industrial-metals-investing\/aluminum-investing\/aluminum-producing-countries\/.<\/p>\n

[5]<\/a> \u201cCapitalIQ.\u201d CapitalIQ, 13 Nov. 2017, www.capitaliq.com.<\/p>\n

[6]<\/a> Rowley, Stuart J. \u201cFord Motor Company: Special Call.\u201d CapitalIQ, Ford Motor Company NYSE:F Special Call. 15 July 2016, www.capitaliq.com.<\/p>\n

[7]<\/a> Shanks, Robert L. \u201cFord Motor Company FQ2 2017 Earnings Transcript.\u201d CapitalIQ, Ford Motor Company FQ2 2017 Earnings Transcript. 26 July 2017, www.capitaliq.com.<\/p>\n

[8]<\/a> Lippert, John. \u201cFord’s Crown Jewel, the F-150, Has a Big Problem.\u201d Bloomberg.com, Bloomberg, 16 June 2016, www.bloomberg.com\/news\/articles\/2016-06-16\/ford-s-crown-jewel-the-f-150-has-a-big-problem-after-overhaul.<\/p>\n

[9]<\/a> \u201cFord and DowAksa Kick off Carbon Fiber Collaboration.\u201d Ford Corporate, corporate.ford.com\/innovation\/ford-and-dowaksa-kick-off-carbon-fiber-collaboration.html.<\/p>\n

[10]<\/a> \u201cChina halts building of coal power plants.\u201d China halts building of coal power plants – Xinhua | English.News.cn, news.xinhuanet.com\/english\/2017-08\/14\/c_136525357.htm.<\/p>\n

[11]<\/a> Climate change, www.hydro.com\/en\/our-future\/Environment\/Climate-change\/.<\/p>\n

[12]<\/a> \u201cAluminium Wrap \u2013 CRU’s 22nd World Aluminium Conference \u2013 Aluminium Insider.\u201d Aluminium Insider, 12 May 2017, aluminiuminsider.com\/aluminium-wrap-crus-22nd-world-aluminium-conference\/.<\/p>\n","protected":false},"excerpt":{"rendered":"

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