HOTTER ON METALS: Aluminium’s Section 232 winners and losers
It’s been nine months since the United States announced Section 232 tariffs, and over six months since a 10% tax was applied to imports of aluminium from Canada, Mexico and the European Union.
There’s been a huge debate over how successful the tariffs - imposed on the grounds of national security and also applied at a 25% rate to steel - have been. Much depends on who you talk to, and what their stake in the situation is.
By far the most vocal about the aluminium tariffs is Glencore-owned Century Aluminum, which cites Section 232 as the reason why it has been able to bring back capacity and invest further at its US plants. It’s joined by Magnitude 7 Metals, formerly ARG International, a much less vocal supporter but one of the two program partners in the American Primary Aluminum Association (APAA) - the other being Century.
A sizeable portion of the rest of the aluminium industry has privately grumbled about or publicly raised objections to Section 232 remedies, noting that neither tariffs nor quotas will fix what they deem to be the real issue at stake – overcapacity in China, helped by state subsidies.
Nevertheless, Century is holding firm. During a recent APAA briefing in Washington DC, Century’s general counsel Jesse Gary said that Canada and Mexico need to be viewed as being in the same tariffs camp as other foreign parties, adding that US national security – and the domestic production of key raw materials – is at stake.
For its part, the APAA notes the overcapacity issue is a global problem, and says its role is to protect the long-term interests of the US primary aluminium industry and its workers.
Just before Canada signed the updated trade agreement with the US and Mexico in November, its President, Justin Trudeau, yet again called for tariffs to be dropped. Neither Century nor Magnitude 7 have operations in Canada or Mexico, but Century’s majority-owner Glencore does, particularly in Canada with nickel, copper, coal and zinc operations plus projects in the offing, as well as agriculture and consulting.
No-one is denying the positive impact of smelter restarts and expansions on communities, jobs and the economy. Where Century and a significant portion of producers and consumers differ in opinion is over the potential unintended consequences of the tariffs, including for American workers with jobs in the mid- and downstream segment of the aluminium industry.
The tariffs have also led to trade spats between the US and its allies, a continuing trade war with China, and chaos as long-established supply chains break down, not to mention a confusing and lengthy exemptions process.
The stated goals of the tariffs are to enable US aluminium producers to operate profitably under current market prices and allow them to reopen idled capacity.
So how exactly have the remedies fared on that basis alone?
Even if fully operational, US domestic producers only have the capacity to meet around a third of the country’s primary aluminium demand needs.
However, if anyone thinks Section 232 tariffs will lead to the resumption of all of this idled capacity along with expansions and even the development of new greenfield capacity, they’re wrong.
US smelters have struggled and closed over decades due to high energy and input costs including for labor and alumina. They’re too expensive to run, which is why capacity has moved away to locations with inexpensive power, such as Canada, Norway, the Middle East and Iceland. Even Century has a smelter in the latter nation, abundant in hydroelectric power.
Century operates three smelters in the US - Hawesville and Sebree in Kentucky, and Mt Holly in South Carolina.
The company said in March that it would restart three potlines totaling 150,000 tonnes at Hawesville and take the plant - which had been operating at 40% of capacity since 2015 - to full capacity by early 2019.
Century chief executive officer Michael Bless said at the time that Section 232 and its impact on premiums – which had almost doubled since the start of the year at that time - were a key reason behind the Hawesville decision, and that he expected premiums to keep rising to price-in the effect of tariffs.
Last month, Century - in which Glencore has a 47.4% stake - said it would boost Sebree casthouse production by 90,000 tonnes of billet and increased scrap reprocessing capacity. Sebree is now expected to produce around 230,000 tonnes of aluminium - both primary and secondary - products in 2019, including roughly 175,000 tonnes of billet. Again, Bless cited Section 232 tariffs as the reason for the investment.
There have been other US primary restarts, but these decisions predate the introduction of Section 232 tariffs, or even knowledge that tariffs might come.
That’s the case with Magnitude 7, which was formed by former Glencore traders Matt Lucke and Zach Mayer in 2013. It bought the New Madrid smelter in Missouri for $13.7 million in September 2016. The plant was closed by Noranda six months earlier and has an annual nameplate capacity of 263,000 tonnes.
In May 2017, months before Section 232 tariffs were announced, legislation in Missouri pointed to support for a more competitive energy rate to allow the smelter to restart. At this time, Magnitude 7 had already filed a draft operating permit seeking to restart capacity at the plant.
A restart was confirmed the following month.
Another company often erroneously lumped into the Section 232 restarts group is Alcoa, which restarted three of five potlines at its Warrick smelter in Indiana. The lines were originally idled in March 2016, but the announcement was made in July 2017, long before Section 232 tariffs were announced.
The restart, made on economic grounds, brought back 161,400 tonnes of capacity by the second quarter, leaving two of the potlines curtailed. Then in May, Alcoa shut down one of the recently restarted potlines, with capacity of around 50,000 tonnes per year, after a power outage at the site. That’s taken Warrick production capacity to 111,400 tpy.
Alcoa also said in June it would permanently close one of the potlines at its Wenatchee smelter in Washington state. The 38,000 tpy potline had not operated since 2001, a second closed permanently in 2004, and the other three potlines had been shuttered since the end of 2015.
A possible restart of the other three potlines is being evaluated along economic lines, but this assessment predates Section 232 tariffs, which have not led to its restart yet either.
While restarts are clearly great news for parts of the US smelting sector as well as jobs, to ascribe responsibility for the entire capacity planned to be brought back online to Section 232 is wrong. Although 614,400 tpy of US capacity has restarted, only Century’s announced 240,000 tonnes total came after the tariffs with the rest already announced and/or due to other factors.
So do Section 232 remedies help producers operate profitably on a price basis?
On the pricing front, the relative gains in the US Midwest premium since tariffs have been outweighed by the decline in the London Metal Exchange cash price, with the result that the all-in aluminium price – the LME cash price plus the domestic premium - is actually now lower than it was at the start of the year.
The US Midwest premium rocketed from 9-10 cents per lb at the start of the year to 22-23 cents by April, just shy of all-time highs of 24 cents per lb at the start of 2015. The market is now bumping along the 19 cents level, with Fastmarkets’ P1020 Midwest aluminium premiums at 18.75-19.25 cents per lb on December 18.
In contrast, LME cash prices started the year around $2,252 per tonne, reached $2,484 in April and have slipped to below $2,000 for the past two months. The LME aluminium cash price is currently around $1,920 per tonne.
According to Fastmarkets’ head of base metals research William Adams, this means the all-in aluminium price started the year at around $2,460 per tonne, peaked at around $2,980 per tonne in April, and is now roughly $2,339 per tonne – down over $100 per tonne since before tariffs were imposed.
Obviously there are other factors that go into the production of aluminum, including the cost of raw materials such as alumina, which rose 75% from the start of the year to peak at over $707 per tonne, according to Fastmarkets’ benchmark daily alumina index fob Australia. Alumina prices are now closer to where they started the year, but the floor has lifted and lessons from the rollercoaster experience harshly learned.
Century cited high alumina prices as one reason for an almost halving of its adjusted earnings before interest, taxes, depreciation and amortization (Ebitda) in the third quarter from three months earlier, while the share price of the company, which has a market cap of around $750 million, has also declined by over 225% since the start of the year.
So for producers with higher alumina input costs and lower all-in aluminium sale prices, it is not such a pretty picture, even with efforts to pass costs down to consumers.
But as a pure premium play, the benefits of Section 232 this year are clear – the US Midwest premium is at still elevated levels. Moreover, for a company like Glencore, which has seen premiums double, it is a winning scenario in a business that is notoriously high volume, low margin. Especially since it sells alumina to Century, based on a published index price, and buys the aluminium the US firm’s smelters produce for resale.
Not that there’s anything wrong with that. But for a company that already has a considerable portion of the stored metal in the US, namely Castleton’s stockpile in Braithwaite, New Orleans, as well as stores and supplies metal produced by Russian producer UC Rusal around the world, it’s a pretty interesting situation to be in.
A company that owns most of the metal has control over most of the sales. In the game of chess that is global trade, that’s a strong position and certainly a key influence on the direction of premiums worldwide.
Of course, the premiums game is expected to change if the US Congress approves a proposal to remove Rusal from the sanctions list next month. But even if premiums slide lower in the short term, it’s been a great year for all except consumers on that front.
There’s a huge debate over the cost to companies of Section 232 tariffs.
New data released by free trade advocates Tariffs Hurt the Heartland and compiled by The Trade Partnership from monthly US government data shows that aluminium products subject to Section 232 remedies faced $134 million in tariffs in October, up from $10 million a year earlier and despite a 4% decrease in the value of imports.
Alcoa, for instance, in the second quarter incurred $15 million of costs for tariffs on imports from its foreign operations for US sale; Alcoa’s imports were primarily from Canada, which supplies about 45% of US primary metal needs, with about 70% of the country’s aluminium production destined for its neighbor.
There is concern about the effects further downstream too. The US Beer Institute, for example, estimates that a 10% tariff on aluminium will cost the country’s $350 billion beer industry more than $340 million annually and impact some 20,000 jobs.
A report by the Economic Policy Institute says this is false, and that there is no evidence of job losses in the beer industry as a result of the tariffs.
Beer brewer MillerCoors, meanwhile, which buys 0.5 billion lb of aluminium every year, has said it is deeply concerned about a possible pullback in expansion, acquisitions and innovation in the industry. Coca Cola has already hiked prices on its carbonated drinks, with CEO James Quincey saying during a call with analysts that the move was “disruptive” but necessary with tariffs a key reason given higher can costs.
It is probably too soon to understand the full impact of Section 232: it will take longer for the effects to work their way through to the downstream sector.
But clearly negotiations to deal with aluminium market overcapacity would be much more palatable to a majority of the industry. It is something that could be pushed in bilateral US-China trade talks, or via multilateral World Trade Organization talks on subsidies, such as are planned by US, Japan and the EU in 2019.
Things could change very quickly, adding more uncertainty into the sector right now. But one thing is for sure - what works for steel producers does not necessarily work for aluminium.