As the attention of the world’s media and markets are focussed once again on the queues to extract metal from LME warehouses, the debate has edged the far more important issue of tariffs further into the shadows.
Until such time as the WTO removes tariffs on downstream products, it is worth asking what the effect would be of reducing all primary aluminium import tariffs – unwrought unalloyed and alloyed – to 0%, while leaving import tariffs on semi-fabricated and fabricated products as they are?
Aligning trade tariffs with competitors is a crucial step towards creating a fair competitive base – a level playing field for all market participants.
Level playing field
At this point we hear screams from some sectors of the industry crying “foul”, as they shout that energy costs, labour costs, environmental standards and other factors are also essential components of a level playing field.
Not true. These are issues industries have to manage, and which are ultimately reasons why industries close or move from some countries to others.
Japan, the USA and other developed economies with unsustainable energy costs for competitive primary aluminium production removed primary aluminium tariffs decades ago, to provide competitive aluminium supplies to their downstream industries.
From 1982 until 1995 I was employed by Alcan as metal supply manager for European plants. I then moved to Dubal as marketing director, to set up a global sales organisation. In 2003 I became an adviser to Dubal Marketing (and remain in this position), and about the same time I joined the Advisory Board of Rheinfelden Aluminium (EU).
Also in 2003, I was invited by FACE to be its president, a position I still hold.
I have had access to global market premiums for primary aluminium products since 1982. I have observed closely the damaging effect that primary tariffs have had on some downstream sectors, and the abuses perpetrated by some primary companies to protect the benefit the tariff gives them, both in higher market prices and – more importantly – in influence over customers through restricting competitive supplies to the EU.
Abuse of the tariff structure has been, in my experience, continuous, as producers, traders and forwarders sought to gain financial advantage from procedural weaknesses. Here are some examples:
- When a 6% tariff was applied to all standard primary products, scrap imports were free from duty, as is the case now. Large quantities of high quality material were imported from eastern bloc countries into the EU by remelters and refiners. This material was designated as “scrap”, after good product was deliberately damaged with welding torches or shears to circumvent the duty.
- Primary producers, traders and forwarders voided tariffs on imports from Canada and South America by declaring the product to have come from St Pierre et Michellon or Aruba, an extreme abuse of EU concessions to “Other Islands and Territories”.
- Producers in EFTA countries imported large volumes of EU duty-payable primary product and processed it into added-value products, to sell into the EU on a duty-free basis.
- Duty drawback inconsistencies continue to provide unfair advantages to some companies. The concept that export outside of the EU of aluminium in a product allows a duty free import of the aluminium in the product is absolutely justifiable, but this practice became unfair when some countries confidentially bent the rule to allow a recovery factor of 2 to 1, while others only allowed 1 to 1.
- Allowing companies to sell duty draw back certificates claimed against products exported from the EU, when those companies have been granted permission to import primary aluminium on a duty free basis, is distorting competition between EU companies.
Technology and competition
None of the nationalised aluminium companies exist anymore, having been lost through takeovers and in most cases split up.
Much of the remaining EU primary aluminium smelter capacity is in the higher-cost quartiles of global capacity, and is in a similar grouping when the age of its smelters is considered.
China apart, the claims of higher environmental and safety standards when compared with other smelter sources supplying the EU are not justifiable, just as claims that they lead the world in smelter technology are similarly invalid.
The vast majority of employees in the EU aluminium industry work downstream of the primary smelters, in rolling, extruding and casting operations.
In these areas, EU companies compete globally in technology and research terms, but continuing profitability and capital investment are essential to maintain their status.
So, what would be the effect of reducing to 0% the import tariff on unwrought unalloyed and alloyed primary aluminium product?
- The EU primary aluminium market would regain its competitive status, with suppliers quoting directly to consumers and reducing the amount sold through traders. The main benefit would be on unwrought unalloyed, which – except for a small amount of high purity – is not produced in EU smelters. (See charts showing unwrought primary aluminium purchases over 14 months by a Face member. The suppliers are all trading companies, and the sources all outside the EU. This is typical for virtually all SME’s in the EU.)
- The concept of duty paid and duty unpaid would cease, EU premiums would align with global premiums, with the cost of logistics being the main differentiator.
- The price of aluminium delivered to EU customers would drop over time, on average equivalent to the 6% duty. It is the duty paid alloyed premium that sets the market for most primary aluminium users, as ultimately it is virtually all alloyed before processing.
- Middle East and probably Russian suppliers would seek long-term supply relationships, which could include short-term delivery systems, joint research investment and continued environmental investment to benefit both parties.
- Logistically, the EU benefits from the proximity and shipping routes to Gulf and Russian smelters, the only significant sources of export capacity able to feed the structural shortages of the USA, EU and Asia (excluding China).
- Norway, Iceland and Mozambique would continue to be major suppliers to the EU, (as Canada will to the US), but on a normal open-market basis, as logistical costs will maintain the status quo.
- The technically best and logistically closest smelters to the strongest EU customers will continue to operate. They produce all added-value products and can justify a premium based upon dependency.
- Vulnerable smelters are under threat and some have closed, even with the tariff in place. Retaining the tariff will not save them, but if they are deemed to be nationally strategic, some form of government subsidy may be the only practical solution.
- Abuse and corruption facilitated by the complex tariff structure would be eliminated.
- Secondary aluminium refiners would see the secondary foundry alloy tariff also reduced to 0% and scrap prices would also drop, but as this levels the playing field with the rest of the developed world, and EU refiners have 95% of the EU secondary ingot business, this is a manageable scenario.
- Downstream industries would be more competitive, making them more profitable and giving them a more secure future.
As part of its centenary celebrations, Metal Bulletin has asked leading participants from different parts of the metal and mining industry to take part in MB’s Next 100, a series of pieces on how the future might unfold.