An online article talks about the growing demand for aluminum in North America, especially from the automobile manufacturers. Aluminum demand will continue to grow at the expense of the steel as evident by Ford’s introduction of 2015 F-150 truck whose entire body is made of aluminum. This is significant because F-150 has been the best selling truck in the U.S. for 37 years (Azzarello). It is clear that the demand for steel will decline just as the demand for aluminum grows because aluminum and steel could be considered as close substitutes if not perfect substitutes in the automobile sector. This also points towards the highly likely possibility that the price elasticity of demand for steel will only grow which may force steel manufacturers to reduce their prices to not only protect revenues but also market share. On the other hand, the price elasticity of demand for aluminum may decline because the changing trends such as new safety regulations as well as greater customer emphasis on safety means automobile manufacturers will have little choice but to rely on aluminum. Aluminum is lighter as well as stronger than steel which doesn’t only improve vehicle safety but also helps make vehicles more fuel efficient. In fact, the article mentions that expanded regulations regarding fuel efficiency have also caused an increase in demand for aluminum (Azzarello).
It is also clear that the supply of aluminum will drastically increase as the article mentions that aluminum has been primarily limited to generally high-end auto brands but now it may expand to mainstream mass-market brands. An increase in supply of aluminum may help reduce price as supply and price of a product have an inverse relationship.
As the article shows, the demand for aluminum has been gradually increasing over the last four decades and is not a new phenomenon. Average aluminum use in a light vehicle was less than 100 lbs in 1075 but now it has increased to over 350 lbs and is expected to exceed 400 lbs by next year (Azzarello). This may also be due to the fact that the average cost of aluminum may have been declining over the decades.
Demand for aluminum is not expected to grow only because it is a close substitute to steel but also other metals such as copper. The article does hint that declining prices for aluminum has also been making it more attractive for industrial producers. Copper and aluminum cost almost the same in year 2000 but now copper is about 4 times as expensive as aluminum (Azzarello). This is another proof that when price of a certain commodity or product rises, its demand declines and a substitute product or products may see a rise in demand.
Copper’s price has also been rising due to limited supply (Azzarello) which doesn’t come as a surprise since limited supply usually translates to an increase in price, especially if it is outstripped by demand. This may also have led to an increase in demand for aluminum which doesn’t have the supply constraints faced by copper.
Even though rising demand for a product results in an increase in price, this can be avoided by a larger increase in supply. This may explain why aluminum prices continue to be competitive because aluminum production rose by 16 percent from 2009 to 2012 (Azzarello). An increase in production may be helping aluminum producers achieve economies of scale and, thus, offer competitive prices to automobile manufacturers and automobile manufacturers are responding by speeding up the transition from steel to aluminum.
- Azzarello, Samantha. The Changing Demand for Aluminum in North America. 18 March 2014. 27 October 2014 http://openmarkets.cmegroup.com/7855/the-changing-demand-for-aluminum-in-north-america
