Oct 5 Reuters) - Tighter environmental standards are forcing truck makers to use more aluminum in manufacturing to save weight, a trend that could make Alcoa's business making wheels for commercial vehicles a bright spot in its earnings release next week.
With aluminum prices hovering around two-year lows because of weak global demand and Chinese over-production, analysts expect Alcoa's third quarter results on Tuesday to show it broke even, down from a profit of 15 cents per share a year earlier, according to Thomson Reuters I/B/E/S.
"The potential that they might squeak by with a profit suggests they are being propped up by downstream businesses," said Morningstar analyst Bridget Freas.
Those downstream operations include Alcoa's wheels business, which makes up over 80 percent of the commercial transport segment within its Engineered Products and Solutions group. Although overshadowed by the aerospace business, commercial transportation is growing.
The company had commercial transport revenue last year of $850 million, or 16 percent of the group's annual revenue of $5.4 billion -- up from 13 percent in 2010. Alcoa's total revenue last year was $25 billion.
Aluminum wheels, which are lighter than steel, have been around for many years. New emissions and fuel efficiency regulations favor increased use of them by making it more crucial for truck owners to reduce vehicle weight.
In 2010, the U.S. Environmental Protection Agency issued rules requiring 18-wheel rigs to reduce carbon dioxide emissions and fuel use, starting in 2014. They must reduce CO2 emissions by as much as 20 percent by the 2018 model year and boost fuel efficiency to an average of 8 miles per gallon from 6 mpg.
That has opened the way for more use of aluminum in trucks, especially in the wheels, industry experts say.
"What's beginning to happen, with the new EPA fuel economy rules for trucks, (is that) manufacturers ... are putting these things on because the less they get that truck to weigh, the more fuel efficient it is," said Ted Scott, director of engineering at the American Trucking Association.
While the downstream businesses are a bright spot, Alcoa faces big challenges in its core businesses of mining bauxite and producing aluminum. Demand is strong in aerospace and transport, but other sectors, such as construction, have not recovered from the recession and over-supply in the industry has kept prices low.
Dahlman Rose & Co analyst Tony Rizzuto cut his rating on Alcoa shares to "hold" from "buy" because of weak aluminum prices. "We haven't seen signs of any fundamental changes that should provide support for a meaningful move higher," he wrote.
LIGHTENING THE LOAD
Alcoa, the biggest manufacturer of forged aluminum wheels, has more than a 50 percent share of the market, experts say. Tim Myers, president of the company's Wheels and Transportation Products unit, says Alcoa's wheel is about 40 percent lighter than a traditional steel welded wheel.
Manufacturers are also using more aluminum in other parts of vehicles.
"When you take out the mass, you get better fuel efficiency, but also the vehicle can haul more," Myers told Reuters in a recent interview.
He said a forged aluminum wheel can take out as much as 1,400 pounds or 2 percent from a truck fully loaded at 80,000 pounds. "So that means a trucker can haul 2 percent more and that's good for them because most truckers are owner-operators," Myers said.
Navistar International Corp (NAV.N), which sells fleets of trucks ranging from medium-size vehicles to 18-wheelers, is using more aluminum wheels and hubs, said Steve Gilligan, the company's vice president for product marketing.
"If you reduce the weight by 1,000 pounds you can save 1 percent in fuel economy," Gilligan said. He declined to say how much steel and aluminum the company purchased.
Dick Schultz, a motor industry expert with the consulting firm Ducker Worldwide, said he expected more aluminum wheel use.
He said the number of trucks built in the United States fell to around 165,000 per year during the recession, but is back to around 300,000. "It's a growing sector, the aluminum industry is about to burst at the seams."
Schultz estimates about 5 billion pounds of aluminum go into truck production per year and could rise to 9 billion by 2025. "That's bigger than the (beverage) can market."
(Additional reporting By Lynn Adler in New York; Editing by Patricia Kranz and Alden Bentley)