Center Valley, Pennsylvania 13/07/2016 - China should not be solely blamed for the slow death of the US primary aluminium industry, consultancy UNO International Trade Strategy said, warning that onerous and misplaced trade barriers will only damage America's thriving downstream sector.
The US primary aluminium industry is no longer globally competitive. In 2001, there were 23 smelters in the US; currently, there are only five.
"A frequently offered explanation for this development is China’s emergence as a global leader in primary aluminium production which has resulted in industry-wide overcapacity," the UNO report - authored by James Breeden, Thomas Fischer and Jussi Uitti - said.
"In turn, this overcapacity has created a drag on aluminium prices which has resulted in the closure of aluminum smelters and the loss of jobs. This same argument targeting China has been trumpeted by the US industry, politicians and the media alike," the report added.
This populist narrative is easily digestible and works well in soundbites but it also lacks nuance and falls apart when the data is analysed, the UNO report claims.
"The underlying logic of this argument is centred on a zero-sum perspective in which increases in Chinese production directly resulted in the shuttering of US primary aluminum production," the report said. "In a global industry encompassing producers across several countries, applying such simple logic entirely overlooks other critical factors contributing to the slow demise of the upstream sector in the US."
UNO is a consulting firm that offers services related to international trade strategy, including trade remedies, market access, tariff and non-tariff barriers, customs, trade creation and enhancement, capacity building, negotiations for preferential arrangements.
HIGH-COST COUNTRY
Primary aluminium production in the US peaked in the early 1980s and has trended downwards ever since. Its decline started well before China's rapid expansion of its primary aluminium capacity, which began in 2000.
"US upstream producers are hamstrung by high electricity costs, strict environmental regulations and a strong dollar which collectively undermine their competitiveness," the UNO report said.
The average cash cost to smelt primary aluminium in the US is $1,723 per tonne compared with a global average of $1,348. The average cash cost for China is $1,374, whereas Russia and Canada have cash costs of $1,268 and $1,212 respectively, the report said.
Moreover, the current oversupply of primary aluminium is largely the result of strategic errors made by global producers with respect to the Chinese market, the report claims.
"Given China's sustained economic growth, large scale aluminium producers correctly predicted the increase in Chinese demand for aluminium. Because China lacked sufficient amounts of high-quality bauxite and inexpensive energy, the conventional wisdom was that China would import primary aluminum to feed the demands of its rapidly expanding downstream industry," the UNO report said.
In 2000, China's imports of primary aluminium accounted for more than 25 percent of its consumption. The general consensus among major producers such as Alcoa, Rio Tinto and Rusal was that China's appetite for imported aluminium would only grow.
"China's consumption of metals has been rising by over 10 percent annually and, for the time being, rapid growth seems likely to continue," Rio Tinto said in financial documents in 2002.
"This is leading to a major redistribution of global demand over a relatively short period of time. Since the majority of Rio Tinto's productive assets are close to the Pacific Basin, we are particularly well placed to benefit," Rio Tinto added.
In 2009, Russian producer Rusal noted that the location of its smelters and its competitive cost structure positioned it to become one of the "main external suppliers to China, where demand for aluminium has been growing consistently".
Based on this widespread belief, the Middle East, Russia and Canada have all steadily expanded their respective capacity since 2000.
"In retrospect, this strategic pivot to the Chinese market on the part of multinational aluminium producers has proven to be a critical misstep. The anticipated surge in exports to China did not occur," the UNO report said.
"Rather, the Chinese government made controlling the value chain of those commodities critical to economic development a national priority," said the report, which added that import penetration into China's aluminium market was a mere 0.4 percent in 2015.
PIVOT TO DOWNSTREAM
Here in the US, there has been a strategic shift over the past two decades from energy-intensive smelting to the downstream markets consisting of value-added aluminium products.
"This shift has been driven by the pricing premiums and higher profit margins of value added products compared to the upstream business. The increased focus on value added products has largely offset the struggles of primary producers such that the overall US aluminum industry - the entire value chain encompassing the upstream and downstream sectors - grew by three percent in 2014," UNO said.
"The rapidly expanding market for aluminum products - driven primarily by the automotive, transportation and construction sectors - along with historically low prices for primary aluminium has greatly benefitted downstream producers," it added.
For example, shipments to North American transportation markets totalled 8.404 billion pounds in 2014, doubling from 2009. Taking into account all downstream markets, 2014 shipments were up 36 percent on 2009, the report said.
Perhaps the best example of this change in market structure is Alcoa, which later this year will separate into two independent, publicly traded companies.
The upstream company, which will retain the Alcoa name, will comprise five business units that make up global primary products - bauxite, alumina, aluminium, casting and energy.
The downstream company will be called 'Arconic'. It will be a value-added venture that includes divisions for global rolled products, engineered products and transportation and construction.
TARRIFFS WOULD DAMAGE DOWNSTREAM
Trade restrictions against Chinese primary aluminium supply might score political points but won't bring a significant amount of production back to the US, the UNO report said.
"US policymakers are faced with a dilemma: succumb to the popular, politically convenient anti-China argument and develop policies - such as trade barriers - to protect a declining and unprofitable sector of the industry at the expense of industry's downstream business or take this opportunity to implement policies that incentivise aluminium producers to undertake the strategic shift to the growing and more profitable value added market," it concluded.
But there are still plenty of market participants who would like to see trade action taken against China. Century Aluminum, which operates three US smelters, has formed a coalition to combat Chinese aluminium trade practices that they argue violate WTO rules.
"Illegal subsidies that are being given in China that aren't available to others that are being given to Chinese producers in contravention to global trade laws," Bless said. "And we think the remedy ought to be some combination of tariffs and/or quotas to address that."
The coalition will call on the US government for "immediate bilateral talks with China to either remove or eliminate these subsidies or face retaliation", it said.
(Editing by Mark Shaw)