Ford Motor Company Faces Steel & Aluminum Supply Price Headwinds

The recent Chinese curtailment of steel and aluminum production has created a $1.2 billion pricing headwind for the Ford Motor Company that threatens to lower profitability for years to come.

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’s increasing pollution problem[1]. 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][3][4]. Given the globe’s 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]. Unfortunately, on a short-term basis, due to the Ford Motor Company’s 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]. In fact, this pass-through of increased costs is already being evidenced in the Company’s forward-looking estimates, which highlight commodity costs will be a $1.2bn headwind on profitability for the FY2017[7]. However, on a longer-term horizon, China’s 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.

Fortunately, the Company’s 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]. 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]. 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.

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]. 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][12]. 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.

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’s window to market with such products? Additionally, are China’s curtailments a temporary blip and the country will return to previous production levels despite the pollution ramifications?

(800 words)

[1] Lian, Ruby, and Melanie Burton. “China orders aluminum, steel cuts in war on smog.” Reuters, Thomson Reuters, 1 Mar. 2017,

[2] Lian, Ruby, and Melanie Burton. “China orders aluminum, steel cuts in war on smog.” Reuters, Thomson Reuters, 1 Mar. 2017,

[3] Sawe, Benjamin Elisha. “Top 10 Steel Producing Countries In The World.” WorldAtlas, 8 Aug. 2016,

[4] “8 Top Aluminum-Producing Countries.” Investing News Network, 20 Mar. 2017,

[5] “CapitalIQ.” CapitalIQ, 13 Nov. 2017,

[6] Rowley, Stuart J. “Ford Motor Company: Special Call.” CapitalIQ, Ford Motor Company NYSE:F Special Call. 15 July 2016,

[7] Shanks, Robert L. “Ford Motor Company FQ2 2017 Earnings Transcript.” CapitalIQ, Ford Motor Company FQ2 2017 Earnings Transcript. 26 July 2017,

[8] Lippert, John. “Ford’s Crown Jewel, the F-150, Has a Big Problem.”, Bloomberg, 16 June 2016,

[9] “Ford and DowAksa Kick off Carbon Fiber Collaboration.” Ford Corporate,

[10] “China halts building of coal power plants.” China halts building of coal power plants – Xinhua |,

[11] Climate change,

[12] “Aluminium Wrap – CRU’s 22nd World Aluminium Conference – Aluminium Insider.” Aluminium Insider, 12 May 2017,


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Student comments on Ford Motor Company Faces Steel & Aluminum Supply Price Headwinds

  1. Great topic! The materials shortage due to China’s curtailment of exports is certainly having global impacts on many industries, from automotive to renewables. In the wind industry, for example, neodymium and dysprosium are required for making super-strong magnets for wind turbines. However, China has a near monopoly on the world’s neodymium supply (>90%), and has caused serious price fluctuations in the past. The renewables industry, instead of hedging against these price increases, has either started to mine these elements domestically, or has invested in developing alternative materials. Applying these lessons to the case of Ford, I do not believe hedging against steel/ aluminum prices is a sustainable solution, especially if China’s policy is meant to be more permanent. Instead, I would strongly support the idea proposed of utilizing carbon-fiber frames. While the technology is still not cost-effective, this is probably a better use of resources for Ford that will give it a longer-term competitive edge.

  2. What an amazing essay!

    I would agree with Shrkatch that adopting a strategy of hedging steel prices at this time is not a great idea. While Ford is currently feeling the pain of its long-term decision not to hedge, there have been many years prior to now when this policy has been very advantageous to the company’s financial results. At this time, Ford runs the risk of ‘locking in’ at high steel prices that would diminish the company’s ability to capitalize on its no-hedging strategy in the future. While I thought the hedging proposal was awful, I did agree with the idea of shifting production towards aluminum. Carbon-fiber frames are a great idea in the long-term, but it will probably be several years (likely decades even) before carbon-fiber becomes a cost-effective alternative. In the meantime, I do not expect that consumers would be willing to pay extra for carbon-fiber frames. However, the shift to aluminum if financially viable to Ford and offers consumers the immediate benefit of improved gas efficiency as well as the opportunity to keep costs low, continue to meet consumer expectations of having a metal-framed vehicle, and to utilize a metal that is incrementally better for the environment.

  3. Thanks, DM. Very interesting stuff. I wanted to address one of the questions at the end of your post, specifically around whether this is a temporary blip. My understanding of the situtation in China, at least as it pertains to aluminum production, is that the regions affected will likely be subject to the same anti-pollution regulations in the foreseeable future. The top 3 aluminum producing regions account for 70% of the total output, and those are among the most smog-plagued regions. The country is in the midst of observing the significant health risks that occur from the pollution spike, particularly in the winter, and to backtrack on these pollution-curbing policies would indicate a surely unpopular view on the low value of human life. All this is to say that the pressure for Ford to figure out a path to cost-effective carbon fiber as soon as possible is extremely high.

  4. DM- nicely done! Really interesting read. I like your suggestion of making hedges on aluminum and steel, and wonder if the company has moved into that at all without publicizing it. Second, I am curious about your question regarding customers willingness to take on cost of production of carbon fiber vehicles. I would wonder as well if Ford would be explicit about passing through these added-costs to their consumers?

  5. Great read, thank you! I think the question in your last sentence is absolutely critical in this situation. Even if China returns to previous production levels in the future, would Ford want to accept the risk of a similar disruption in aluminum supply in the future? I guess the answer is no. Even if the current situation in China is temporary, Ford got a very clear message and should develop a long-term plan that will allow undistributed manufacturing process.
    Regarding introduction of carbon fiber-bodied vehicles, my major concern would be safety. Ford will need to execute extensive and compelling research in order to demonstrate acceptable risk of safety of such carbon fiber-bodied vehicles. They will need to convince customers that these new carbon cars are no different to traditional metal cars.

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