Booming European Car Industry Funding Fuel Economy Investments

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Car sales may be flat in Europe — for Peugeot, sales dropped 4 percent in the first six months of this year — but Europe’s car makers are posting record profits, both in terms of absolute numbers and in terms of profit margins.

So…Why?

The reason of course is Asia, or more precisely China, where unprecedented demand is driving auto sales and particularly premium Western brands.

The effect is likely to project VW into the global No. 2 slot up from 7.3 million vehicles in 2010 to 8.0 million vehicles in 2011, behind GM’s projected 8.5 million, but ahead of Toyota’s 7.5 million, according to NordLB analyst Frank Schwope, quoted in Reuters. VW sales in the first half of 2011 jumped 14.1 percent to 4.09 million vehicles across all eight of its car brands, from Audi to Skoda. The firm delivered 853,000 cars in China during the period, compared to just 302,000 in its home market of Germany. Needless to say, China remains a priority where VW has earmarked nearly $15 billion for China alone from the firm’s $72 billion five-year investment program.

Another German Auto Giant Gains Ground In China

Nor is it just VW that is doing well. The BMW Group (comprising BMW, Rolls Royce and Mini brands) forecast that it will top 1.6 million car sales in China this year, 10 percent more than last year and up on estimates earlier this year. So strong are German carmakers’ brand image in China, that Arndt Ellinghorst, head of automotive research at Credit Suisse, quoted in the FT, likened BMW’s brand equity in China to that of a luxury label like Hermès.

Buoyed in part by this level of demand, BMW managed to increase sales by 28.9 percent to nearly $24 billion, but net profit to $1.7 billion, an increase of 274 percent as margins rose to 11.9 percent in the first quarter. This rise in profit margins and overall sales volumes bodes well for future research and development budgets that in turn will usher in new opportunities for suppliers.

What This Means For Aluminum

On the back of BMW and Land-Rover’s moves to greater use of aluminum, European rolling mills are looking to make significant investments in new rolling mill capabilities to exploit the demand.

Rising automotive sales are therefore having knock-on effects across the supply chain. As European mills move to value-add automotive grades, they will abandon commercial grades, opening the European market to imports. Not that there is any shortage of willing suppliers: Eastern Europe and the Middle East are front runners, already benefiting from reduced and, in a few cases, zero tariffs.

The supply chain is already adjusting. Greater volumes of commercial sheet have been coming into the European market for the last few years and distributors have been playing catch up with the developing supply picture, learning which qualities they can accept and which of these more far-flung suppliers can meet delivery requirements that, if not matching previous local mills, at least provide a workable substitute. As a result, a number of specialist master importers have grown up bringing in volume supplies, holding stock and supplying the small- to medium-tier distributors in volumes more suited to their buying profile and cash flow limitations.

As the European automotive industry, driven by improved profitability, steps up innovation and fuel efficiency targets, the ripples will be felt throughout not just the aluminum suppliers, but likewise among the wider supply market.

–Stuart Burns

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