Column: U.S.-EU tariff truce cold comfort for aluminium consumers: Andy Home

China Hongqiao

03/11/2021 17:06

(The opinions expressed here are those of the author, a
columnist for Reuters.)
    By Andy Home
    LONDON, Nov 3 (Reuters) - At first glance, the tariff truce
between the United States and the European Union (EU) looks like
a win-win.
    However, European Aluminium Association (EAA) director
general Gerd Götz called it a "lose-lose situation for the
aluminium industry and their downstream customers on both sides
of the Atlantic."
    The United States will exempt European steel and aluminium
imports from tariffs of 25% and 10% respectively, while the EU
will drop its retaliatory tariffs on U.S. products including
whiskey, power boats and Harley-Davidson motorcycles.
 urn:newsml:reuters.com:*:nL1N2RR08H
    But the tariffs are replaced with quotas. This political
sleight of hand effectively swaps one trade barrier for another
and is unlikely to reduce the cost of aluminium for either
European or U.S. consumers. 
    A joint commitment to address global excess capacity by
restricting higher-carbon metal lent a nice COP-26 touch to the
deal but comes with a two-year timetable which may well be
overtaken by aluminium's fast-changing dynamics.
    
    QUOTAS FOR TARIFFS
    There will be no return to the way things stood before
former U.S. President Donald Trump's administration initiated
Section 232 tariffs on national security grounds in 2018. 
    Rather, tariffs on European imports will be replaced with
tariff-free quotas based on 2018-2019 volumes, translating into
18,000 tonnes of unwrought aluminium and 366,000 tonnes of
wrought products. 
    This complements a similar arrangement with Canada, the
largest supplier of aluminium to the United States. 
    President Joe Biden's administration is simply alternating
between the policy options laid out in the U.S. Commerce
Department's original Section 232 analysis.
    The report suggested "specific countries" could be exempted,
partially or fully, from tariffs or quotas "based on an
overriding economic or security interest of the United States,
which could include their willingness to ... address global
excess capacity and other challenges facing the U.S. aluminum
industry."
    Three years later, Europe has evidently just qualified.
    
    NO PRIMARY REVIVAL
    Remember, the objective of the Trump tariffs was to get
domestic production of both steel and aluminium consistently
above the 80% level. That has been largely successful in terms
of the U.S. steel industry, which was operating at 84.3% of
capacity in October, according to the American Iron and Steel
Institute. 
    Things have not worked out as well for domestic primary
aluminium production. 
    There was an initial reaction to the tariffs, U.S. output
rising from 741,000 tonnes in 2017 to 1,126,000 tonnes in 2019,
but the trend turned with Alcoa's curtailment of its Intalco
smelter last year. 
    Domestic primary metal production fell 16% in the first nine
months of 2021, with September's annualised run-rate of 901,000
tonnes. That translates into a capacity utilisation rate of just
50%, even though the price of aluminum jumped to last month's
multi-year high of $3,229 per tonne from under $2,000 per tonne
in the first quarter of 2018, just before the tariffs kicked in.
    
    PAYING THE PRICE
    The U.S. tariffs have benefited midstream product makers at
the cost of downstream manufacturers, who end up paying the full
tariff-adjusted price for aluminium, even if it has come from
domestic recycled sources. 
    European buyers are in the same boat, which is why the
Federation of Aluminium Consumers in Europe greeted news of the
tariff truce by pointedly calling on the EU to "accelerate the
resolution of another major problem for Europe", namely the
bloc's own 3-6% aluminium import duties. 
    The aluminium market, particularly at the semi-manufactured
products stage, remains a highly fractured landscape of quotas,
tariffs and an ever-lengthening list of countervailing and
anti-dumping duties. 
    The deal between Europe and the United States may have only
complicated the picture. Quotas "will result in even more trade
distortions" and will "create additional market instability" for
the value-chain, was the EAA's warning. 
    
    WEAPONISING CARBON
    What everyone agrees on is the need to restrain China's
excess capacity and exports. 
    Carbon will be the shield. 
    The arrangement with the EU would help "restrict access to
our markets for dirty steel from countries like China,"
President Biden told reporters. 
    But that may not work for aluminium. China's aluminium
producers are fully aware of the growing differentiation between
low- and high-carbon aluminium. The country's largest private
operator, Hongqiao Group, has already moved 1 million tonnes of
capacity to tap the hydro-electric resources of Yunnan province,
which hosts most of the country's 4 million tonnes of aluminium
capacity, powered by renewable energy. That could rise to 8
million tonnes by 2030, according to consultancy AZ China. 
    That's a lot of "green" aluminium that could be sufficiently
low-carbon to penetrate Europe's or anyone else's carbon walls.
    
    RUNNING OUT OF EXCESS
    Hongqiao has plans to shift another 2 million tonnes of
production capacity to Yunnan's green hills but they are on hold
because the province is rationing power due to drought and
quarterly efficiency targets.  urn:newsml:reuters.com:*:nL4N2R90O7
    That speaks to a bigger shift in the global aluminium
landscape. 
    China's own decarbonisation drive has seen multiple smelter
curtailments and a near freeze on new capacity due to a lack of
available power. 
    Right now, China lacks excess production capacity at the
primary metal stage of the value-chain, and has been a
consistent net importer of unwrought aluminium since the start
of last year. 
    The excess capacity now resides exclusively in the
semi-manufactured products (semis) stage and China remains a big
net exporter to the tune of 4.6 million tonnes in 2020. 
    This imbalance between primary imports and semis exports
does not look sustainable. It may be just a matter of time
before Beijing starts adjusting its export tax regime to
encourage more aluminium to stay at home. 
    What might appear good news for the rest of the world is
tempered by a supply-chain crisis in silicon and magnesium, two
key aluminium alloy inputs. This is due, ironically, to
energy-related closure of production plants in China.
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    China may not have attended the COP-26 summit but its
decarbonisation drive is already disrupting the aluminium
landscape. By the time Europe and the United States come up with
a strategy to deal with China's excess capacity, aluminium
buyers may regret its passing. 

 (Editing by David Gregorio)
 ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter
https://twitter.com/AndyHomeMetals))