March 5, 2018

What would steel and aluminum tariffs mean for automobile costs, materials choice, and fuel economy?

Last week President Trump announced an intention to impose tariffs of 10% on imported aluminum and 25% on imported steel. Although this would drive up costs for automobile manufacturing in general, it could actually have the effect of reducing the cost premium of building more fuel efficient vehicles.

The average domestic light-duty vehicle (LDV) was more than 50% steel by weight in 2015. Of this, about two-thirds was conventional steel, and one-third was high- or medium-strength steels. Aluminum was the #2 material, making up 10% of the weight of the average new LDV. Aluminum and high-strength steel are important for reducing the weight of vehicles and increasing their fuel economy. Each pound of aluminum can replace about 1.8 pounds of conventional steel, while each pound of high-strength steel can replace about 1.3 pounds of conventional steel. Moreover, a 1% reduction in vehicle weight generally results in about a 0.7% decrease in fuel consumption per mile.

Commodity prices appear to be on the order of $0.75 per kg for steel ($750/tonne in North America in recent months) and $2.20 per kg ($1.00 per lb) for aluminum.

Given that the average new vehicle in the US weighs about 4,000 lbs, we can estimate that the tariffs would add at least the following amounts to the cost of an average new vehicle:

4,000 lbs x 51% x 0.454 kg/lb x $0.75/kg x 25% = $174 for the steel content

4,000 lbs x 10% x 0.454 kg/lb x $2.20/kg x 10% = $40 for the aluminum content

The combined cost impact — $214 — is probably quite conservative, in that it relies on basic commodity prices. For example, Midwest Steel Supply quotes prices of roughly $1.75/kg and $6.20/kg for bulk purchases of hot-rolled steel and 6061 aluminum (a common automotive alloy), respectively.

What’s interesting, though, is that these tariffs also would affect the relative costs of using steel and aluminum in vehicle production. Consider a generic 1-kg steel vehicle component. Assuming that each pound of aluminum can replace 1.8 pounds of steel, this 1-kg steel component could be replaced by a 0.56-kg aluminum part (though the exact weight reduction potential of aluminum vs steel depends strongly on where in the vehicle it is being used). Consider the cost of making this component from steel or from aluminum, with and without the tariffs applied:

			Cost per kg		Cost for Component
	Mass (kg)	Tariff Rate	w/o Tariff	w/ Tariff	w/o Tariff	w/ Tariff
Steel	1.00	25%	$0.75	$0.94	$0.75	$0.94
Aluminum	0.56	10%	$2.20	$2.42	$1.22	$1.35
Extra Cost for Aluminum					$0.47	$0.41

Without the tariff, the basic material cost for this component would be $0.75 worth of steel. The material cost for making it from aluminum would be $1.22, $0.47 more than the cost of steel. But since the tariff on steel is higher than that on aluminum, the difference in raw materials cost would fall to $0.41 under the intended tariff structure. On net, this would make aluminum more competitive with steel for automobile manufacturing. Moreover, other advanced lightweight materials like magnesium, plastics, and composites would not be subject to these tariffs, so their competitiveness would be improved relative to both steel and aluminum.

Thus, although the tariffs would increase the cost of vehicle manufacturing overall, they could actually reduce the marginal cost of improving fuel economy through lightweighting.