Benefits of ali 232 tariff limited in scope

The United States' 10% Section 232 tariff on aluminium imports is benefiting some upstream parties but to the detriment of other, more downstream entities that are reliant on imported material – although the upstream benefits might be limited, evidenced by recent market developments.

Alcoa Corp, which operates three smelting operations in the US, has leased unused land at its former Rockdale Operations smelter in Texas along with unused land at its plant in Massena, New York, to companies operating cryptocurrency mining operations that are utilizing the plants’ formidable electricity apparatus.

The Rockdale land is being rented by Bitmain, a Beijing-based cryptocurrency miner. In late 2017, Alcoa confirmed that it would permanently close Rockdale following a strategic review of upstream capacity. The company cited limited economic prospects for the plant, which had been curtailed since 2008.

Another cryptocurrency miner has leased land from Alcoa’s curtailed portion of its Massena facility in New York, according to one local media report.

Cheap electricity is considered a key component in cryptocurrency mining, where computational power is used to add records to the public ledger of past transactions for Bitcoin and other alternative forms of cryptocurrency. This ledger of transactions is otherwise known as a blockchain.

Despite the implementation of the Section 232 tariff on aluminium by President Donald Trump in March, Alcoa has not moved forward with restarting any capacity – unlike competitor Century Aluminum Co, which quickly announced a restart of curtailed potlines at its Hawesville, Kentucky, smelter after Trump signed the order.

According to Alcoa’s top executive, the tariff has not been a strong enough factor to allow the company to restart its curtailed capacity.

“The newest US smelter is about 40 years old,” Alcoa president and chief executive officer Roy Harvey said during the company’s second-quarter earnings conference call on Wednesday July 18.

“Shielding uncompetitive smelters from the realities of global supply and demand has resulted in frequent oversupply in the global market for the last decade. [Section] 232 tariffs are also increasing [the] cost for US downstream manufacturers and will have an impact on their global competitiveness, on US consumers and eventually underlying demand for aluminium in the United States… In short, tariffs will not solve the challenges faced in the aluminum industry,” he added.

But the tariffs are not adequately addressing issues in the US aluminium market. “If you really want to save the US aluminium industry, you have to solve the electricity problem,” an extrusion source told American Metal Market. 

“One could… make the case that if, politically, you wish to maintain a primary aluminium industry, subsidizing electricity prices for the industry might be a more efficient way to do it – [in other words] your costs on the broader aluminium industry and consumers of aluminium products might be less,” John Mothersole, director of research, pricing and purchasing service at London-based IHS Markit, told American Metal Market on August 23.

Industrial electricity prices in the US have long been the major factor when discussing the viability of smelter operations in the US – with talks about both restarting previously curtailed capacity and building new capacity hinging on rates falling.

But rates have not shown strong movement year on year. The US average industrial rate fir the first half of 2018 totaled 6.82 cents per kilowatt hour (kWh), according to the latest data from the US Energy Information Administration (EIA), up 0.9% from 6.76 cents per kWh in the same period last year. The state of Washington continues to lead the country in terms of the lowest industrial electricity rate, averaging 4.56 cents per kWh from January-June 2018, down 0.7% from 4.59 cents per kWh through June 2017.

“Without addressing the industry’s underlying cost structure, the industry survives only as long as the tariffs are in place, [meaning that] they have to be permanent. Is this wise policy?” Mothersole asked.

Alcoa has already taken advantage of electrical subsidies, having struck a deal with the New York Power Authority (NYPA) in November 2015 to provide subsidies worth $30 million through March of next year in order to keep the Massena West smelter open in upstate New York.

Power costs remain the unresolved question in Century Aluminum’s continued operation of its Mount Holly smelter in Goose Creek, South Carolina, with the company attempting to secure sourcing of third-party electric power needed to operate the facility and cut costs.

Aluminium prices on the London Metal Exchange have realigned to a base level of $2,000-2,100 per tonne (90.7-95.3 cents per lb) since spiking after sanctions against Russia’s UC Rusal Plc were announced by the US Department of the Treasury in April.

Following the announcement, the three-month aluminium contract on the LME soared 30.1% to $2,587 per tonne on April 19 from $1,988 per tonne on April 6. Since then, the three-month contract has fallen by 19.4% to $2,085.50 per tonne as of August 24.

Clarity is unlikely to materialize in the US aluminium market in the coming months – in an interview with Metal Bulletin, Norsk Hydro president and chief executive officer Svein Richard Brandtzæg said that the Oslo, Norway-based supplier does not expect to gain any certainty in the US market in the near future.

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