News Analysis date published New: 
Tuesday, July 24, 2012 - 11:30
New Date created: 
Tuesday, July 24, 2012 - 12:36
New Date last updated: 
Tuesday, July 24, 2012 - 11:30

Obama's "CAFE" Mandate Could Double Demand for this Metal

Tuesday, July 24, 2012 - 11:30am

On July 19, I told you about one of the biggest opportunities in commodities since 1997.

If you missed my analysis, the point was simple: Aluminum hasn't been this attractively priced in more than 15 years.

But aluminum's depressed price levels aren't the only reason I'm bullish on the metal. In fact, there's another catalyst affecting this commodity right now... and it could increase demand by more than 200% in a little more than a decade.

Before I get into that though, let me ask you this...

Does your car get 54.5 miles per gallon?

Mine doesn't. Not even close. But that's the mandate that has been set down by President Obama's Corporate Average Fuel Economy (CAFE) standards.

And while you may not have heard about this government edict, the automakers know all about it. The 54.5 miles per gallon rule doesn't go into effect until 2025, but automakers are still scrambling to meet the 2016 CAFE standard of 35.5 miles per gallon.

The United States isn't alone either. Other countries are implementing similar rules and regulations. So automotive engineers around the world are under pressure to find ways to squeeze out more miles per gallon from newer models.

As with any regulatory change, there will be winners and losers from these tighter fuel-economy standards. Judging by feedback from manufacturers, it seems that steel will relinquish some of its market share to aluminum.

Since aluminum is more lightweight than steel, aluminum supports better gas mileage when it's used to make cars. In order to meet the new CAFE mandate, automakers are using more aluminum in the automobile manufacturing process.

That's one reason aluminum usage in the auto sector could double by 2025.

One of the biggest aluminum miners -- Alcoa (NYSE: AA) -- is already starting to see the effects of the CAFE mandate...

In June, Alcoa's Randall Scheps told a group of industry executives:

"We have every car maker calling us, wanting to increase their aluminum content, wanting to start new R&D projects about how they can convert bodies from steel to aluminum, wanting to convert hoods and doors."

This comes from Alcoa's director of automotive marketing, so some cheerleading is to be expected. But that doesn't make his comments less true.

The next time you get stuck in traffic, staring at an endless line of brake lights in front of you, picture all those hoods and doors rolling off the assembly lines with aluminum instead of steel. As a consumer, I'm not thrilled with the fuel mandates. There's no doubt the costs of complying will be passed along to drivers like you and me.

That being said, investors can take advantage of these regulatory catalysts. High-end carmakers such as BMW are already upping their aluminum content. And this could be just the beginning.

Right now, the average vehicle is built with 343 pounds of aluminum. Alcoa believes the total will eventually rise to 550 pounds. Multiply that by about the millions of cars and trucks assembled every year, and you understand why aluminum producers could be in for a demand jolt.

If Alcoa's forecasts are accurate, auto industry aluminum consumption could double to 24.8 million tons per year by 2025 from 11.5 million tons per year.

Don't get me wrong, this investment isn't without risk. The European debt crisis and slowing Chinese growth could hurt demand for automobiles. Not to mention, the mandate changes are still years away and could be adjusted going forward.

But still, this is a major catalyst that aluminum producers like Alcoa have going for them right now.

With aluminum trading at its lowest relative valuation in the past 15 years -- and Obama's CAFE mandate helping surcharge demand for the lightweight metal -- this look like one of the biggest opportunities in commodities we've seen in years.

Good investing!

P.S. -- There is an energy crisis looming in the U.S. In case you haven't heard, in six months a major event will take place that could cause 10% of America's electric energy supply to dry up. As the country scrambles to react, one company could shoot up by hundreds of percent. For more information on how to profit from the coming crisis, click here.

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.