Auto slump slams metals; green trend may help

NEW YORK (Reuters) - Plunging U.S. auto sales have slammed the metals industry, but the sector expects an eventual boost from a trend toward greener cars, although the mix of metals used will change.

"As the economic downturn causes people to postpone vehicle buying, automakers are adjusting their production, which means volume requirements are down for all of their supplies," said Charles Belbin, spokesman for U.S.-based Novelis, the largest aluminum sheet supplier to the U.S. and European auto sectors.

In October, U.S. auto sales slid 32 percent, to lows unseen in 25 years, hitting every major automaker. Auto industry inventories rose to an alarming 98 days worth of supplies.

U.S. auto production for the year to November 15 slid a steep 16.7 percent from last year to the lowest build rate in 15 years. Automakers are announcing new cuts almost daily.

"We estimate that the drop in the country's automobile output will remove about 2 percent of domestic copper consumption this year, making a substantial contribution to our forecast of a near 6 percent year-on-year drop in the country's domestic copper demand in 2008," BNP Paribas analyst Micheal Widmer wrote this week in a research note.

A LARGE DOWNWARD ARROW

He also forecast that the U.S. automotive industry slowdown will reduce U.S. lead demand by 1.5 percent this year.

Elsewhere, warehouse stocks of zinc, used to galvanize steel sheet on car bodies, are up 125 percent from last year.

"Anyone who is a supplier to the auto industry certainly is feeling it, as is Novelis," said Belbin.

But for aluminum, he and others said near-term cuts have been offset somewhat by new applications that use greater amounts of the shiny metal. That trend has been growing in the auto industry for at least 30 years.

Before it gets better, however, analysts expect the near- to medium-term auto industry story to get worse.

Patricia Mohr, economist at Scotiabank Group in Toronto, said U.S. motor vehicle production (cars and light trucks) averaged about 12 million units per year from 1993 to 2007.

She forecasts U.S. output will drop to about 9 million units in 2008, and fall further in 2009 to 8.5 million units.

Harbor Intelligence senior analyst Jorge Vazquez looked at U.S. aluminum inventory trends, auto sales and production data and extrapolated a 30 percent or greater year-on-year decline in aluminum demand from the U.S. auto sector this quarter.

"We believe the first quarter of 2009 will continue to be as negative as the current quarter," he added.

At its recent third-quarter presentation, Alcoa Inc, which supplies aluminum to the world's major auto producers, characterized the sector outlook with a large downward arrow.

CFO Chuck MacLane said Alcoa's "automotive exposure is heavily leveraged to the Big Three" (U.S. automakers) whose production is down nearly 25 percent from last year.

U.S. car makers have been struggling for some time to the advantage of many foreign companies selling in the U.S. market. But lately, no one is immune to the recession.

Accelerated buying in emerging markets like China, India, Vietnam and Eastern Europe had more than made up for the loss in the U.S. market, but that trend is turning too.

This week for example, top Japanese automaker Toyota Motor Corp said it would stop all North American factories for two days next month. The next day it announced output cuts at a car plant in Thailand, due to sliding sales there.

In China, third quarter auto sales tumbled 15 percent.

"The deceleration in China's expansion of car and commercial vehicle production will likely reduce potential domestic lead and copper demand by 0.5 percent and 1 percent respectively in 2008, said Widmer.

CHANGING THE MIX

Vazquez thinks low quarterly comparisons, cheaper energy prices and strong underlying demand from emerging markets should reverse the industry slump from the second quarter on.

Also, the push by automakers to offer lighter, more fuel-efficient cars powered by batteries are still metal intensive, though they may require a different mix of metals.

For instance a lighter chassis may boost demand for aluminum and batteries should boost nickel and lead use.

"Eventually, higher fuel efficiency standards in the U.S. and in Europe will drive more aluminum content in cars and light trucks. But the short-term picture is not promising. Given the current uncertainty, there are most likely more risks to the down side," said Klaus Kleinfeld, Alcoa CEO.

(Additional reporting by Frank Tang and Chris Kelly in New York; Editing by David Gregorio)