The opinions expressed here are those of the author, a columnist for Reuters.)
* US Midwest Aluminium Premium: tmsnrt.rs/3fGM2OC
* US Imports of Canadian Aluminium: tmsnrt.rs/2YTWhbE
By Andy Home
LONDON, June 19 (Reuters) – A surge in Canadian aluminium imports “is destroying what remains of the United States industry”.
The dramatic warning comes from the American Primary Aluminum Association (APAA), which represents Century Aluminum and Magnitude 7 Metals, two of the last three remaining primary producers in the United States.
The solution, they argue in a May 27 letter to U.S. Trade Representative Robert Lighthizer and Commerce Secretary Wilbur Ross, is to revoke Canada’s exemption from import tariffs.
The U.S. Aluminum Association (AA), which has a much larger membership including the country’s third producer Alcoa, vehemently disagrees.
“The Great Canadian Aluminum Distraction” has diverted attention from the sector’s more pressing issues with Chinese overcapacity and exports, it claims.
This uncivil war of words has fueled a sharp turnaround in the Midwest aluminium premium as the regional market reassesses the prospect of renewed tariffs on the largest-volume supplier to the U.S. market.
It also lays bare the failure of President Donald Trump’s 10% tariffs to revitalise domestic production of a metal the administration deems critical to national security.
But is Canada to blame? Or is it the solution?
BATTLE OF THE SURGE
The APAA claims that Canadian imports of primary aluminium have surged since the country was exempted from tariffs in May 2019.
The word has lobbying resonance.
The trade agreement between the two countries includes a provision that tariffs on Canadian aluminium can be re-imposed if imports “surge meaningfully beyond historic volumes of trade over a period of time, with consideration of market share”.
Unfortunately, the trade negotiators didn’t specify what would represent a “meaningful” surge or what time period would be used as reference point.
A diplomatic oversight that now forms a statistical battleground between the APAA and the AA.
It is true that more Canadian aluminium has been entering the United States this year.
Imports of primary metal jumped by 46% year-on-year in the first quarter of 2020, according to research house CRU.
But there are some important caveats.
Firstly, Canadian production has been rising thanks to the return of the Becancour smelter after a bitter two-year strike that ended in July 2019. The plant produced 72,000 tonnes in January-March, compared with just 77,000 tonnes over the whole of 2019.
Secondly, there is the not so little matter of COVID-19 and the demand destruction caused by the lockdown of North America’s automotive and construction sectors.
There is a lot of surplus aluminium around at the moment. London Metal Exchange (LME) warehouse stocks have risen from under a million tonnes in the middle of March to 1.6 million.
Much of that surplus, moreover, is in the form of commodity-grade metal. In response to collapsing automotive demand aluminium producers have shifted their mix away from value-added products to so-called “P1020” aluminium that can be delivered to LME warehouses.
It’s precisely that form of metal that the APAA claims has been surging across the border.
Imports of Canadian alloyed metal, on the other hand, are on course to fall 5% this year as the product mix changes, CRU estimates.
Disentangling such market dynamics from tariff dynamics is highly problematic.
And without an agreed statistical anchor point, one side’s surge is another’s mean reversion.
The first quarter imports were actually only 3% higher than the first-quarter average in 2015-2017, notes CRU.
Canada’s share of the import mix in the quarter was 67%, exactly the same as the 30-year average, according to the AA.
FRIEND OR FOE?
There is one underlying truth in this statistical maze.
Any post-tariff lift to U.S. aluminium production has run its course with all three operators under financial stress at current prices.
Alcoa is shutting its Ferndale smelter in the state of Washington, reducing the number of operating plants to just six.
Ferndale is an old plant, first commissioned in 1966. Production lines have been curtailed and reactivated during past aluminium price cycles.
Indeed, all the remaining U.S. smelters are old, leaving them in the cost-curve danger zone whenever the price falls.
Century’s Hawesville, Sebree and Mt Holley smelters date from 1969, 1973 and 1980 respectively.
The New Madrid smelter bought out of bankruptcy by Magnitude 7 metals was built in 1971. Its reactivation was hailed by the Trump administration as a tariffs success story but local residents are now living with the dirtiest air in the country.
Tariffs can at best only partially shield such operators from global price trends, even while penalising downstream U.S. aluminium users.
That’s a problem for the United States given the determination to build secure supply chains for critical metals such as aluminium.
Particularly since the world’s largest exporter of primary metal is Russia and the largest exporter of semi-manufactured products is China, two highly problematic trade partners.
If the United States is serious about its long-term aluminium supply, it will need to either form an alliance with a friendly producer country or directly subsidise new capacity.
The latter may seem an outlandish idea but the Department of Defense has already been authorised to invest directly into other vulnerable critical mineral supply chains such as rare earths.
In either case Canada is the obvious aluminium choice.
Its smelters are newer, lower-cost and greener thanks to Quebec’s hydro-power systems. It may have room for at least another one. It’s far from clear if the more fractured U.S. energy market can accommodate a new power-hungry aluminium smelter.
Canada’s aluminium sector has also historically been considered an integral part of the United States’ defence sector, a fact easily forgotten in the fractious trade relationship of the last two years.
Re-imposing tariffs on Canadian aluminium may have short-term political appeal ahead of U.S. elections later this year but the problem of the United States’ ageing smelters isn’t going to go away.
Tariffs would actively work against the obvious long-term solution to the United States’ problem with primary aluminium.
It’s ironic that Canadian imports are roiling the aluminium sector even as the two countries work towards a broader metallic alliance.
The U.S.-Canada Critical Minerals Working Group held its second virtual meeting on June 17 with both sides reaffirming their “commitment to further strengthen the U.S.-Canada supply chain for critical minerals that are essential to our mutual security and future prosperity”.
We don’t know if aluminium was on the agenda. If not, it should have been.