HOTTER ON METALS: Section 232 and the Canadian aluminium ‘surge’

Just over a year ago, US Section 232 tariffs against imports of aluminium from Canada were removed. Now there are calls to reintroduce them.

The American Primary Aluminum Association (APAA), which represents US producers Century Aluminum and Magnitude 7, says that Canadian imports have “surged” since the tariffs were removed and are threatening the viability of the US primary aluminium industry. 

In a letter to US Trade Representative Robert Lighthizer, the APAA blamed an increase in Canadian imports for the collapse in aluminium prices and noted that the Covid-19 pandemic had demonstrated how essential the metal is to the US economy. 

“If US smelters continue to shutter, the United States will only become more dependent on offshore supply. While Canadian producers want the windfall of avoiding Section 232 duties, the Canadian surge is destroying what remains of the US industry,” said the letter, signed by APAA chief executive Mark Duffy.

“This situation will increase supply chain vulnerability at the very time the United States is seeking to preserve a threshold level of production at home,” it added. 

The Aluminum Association (AA), which represents more than 120 companies across the industry value chain, would strongly oppose a return to tariffs. According to AA president and chief executive officer Tom Dobbins, there are clear problems with the Section 232 program, but efforts to blame Canada miss the mark.

“To the extent the industry has seen a ‘surge’ in foreign imports in recent years, it has been in flat-rolled aluminium products from countries receiving Section 232 product exclusions. Many of these imports are the subject of ongoing anti-dumping and countervailing duty cases,” Dobbins said.

“Everyone is entitled to their opinion on this issue, but facts are facts. Imports of primary aluminium from Canada today are consistent with long-term trends long pre-dating the imposition of Section 232 tariffs,” he added. 

The ‘surge’

So what does the data show?

For sure, imports from Canada have increased since Section 232 tariffs have been removed.

According to the Aluminium Association of Canada, the United States has been importing an average of 186,369 tonnes of unwrought aluminium from Canada per month through 2020. 

But imports are still down from pre-Section 232 levels. 

In 2017, monthly imports averaged 209,587 tonnes. The Section 232 tariffs were imposed in March 2018

Last year, imports averaged 174,440 tonnes per month, and in the second half of 2019 – after tariffs were removed – the monthly average was 204,638 tonnes. 

Not such a surge after all, then. 

Canada supplies about 45% of US primary aluminium needs, with about 70% of the country’s aluminium production destined for its neighbor. Its biggest supplier is Rio Tinto Aluminium, the largest producer of primary aluminium in North America, with about 75% of its material supplying more than 35 US states.

But it’s a two-way street: Three out of every four cars sold in America contain aluminium from Canada, while one out of every three car and truck wheels manufactured in the US contains aluminium that Rio Tinto produces in Canada. Parts cross the border sometimes more than half-a-dozen times before finishing in a vehicle that ends up in a sales lot in either the US or Canada.

It’s an integrated supply chain that has been built over years and reflects decades of cooperation between the two nations – for example, Canada supplied half the aluminium used by allied forces in planes and other military assets during World War II.

Like it or not, Canada is a critical supplier to the US. The Covid-19 pandemic may have heightened the desire to nearshore supply chains, but that relationship had been in place for years and deepened further recently. 

Last year, Canadian Prime Minister Justin Trudeau and US President Donald Trump announced that their countries would develop a joint action plan on critical minerals collaboration. The goal of the plan, which was finalized in January, is to strengthen North American production capacity and reduce reliance on global value chains for the sourcing and production of these materials.

So why doesn’t the US just produce more aluminium?

A key problem is the high cost of electricity. 

An unprecedented 15-fold increase in spot electricity prices in the US Pacific Northwest – after long-term power contracts expired – led to the curtailment of 10 aluminium smelters in the region in 2000 and 2001. 

The US had 23 operating plants in 1998 but currently has eight, operated by Alcoa, Century Aluminum and Magnitude 7. Even if every domestic smelter were fully operational, the US could only meet around one-third of its demand for primary aluminium. 

That’s not to say there should be more greenfield projects or restarts in the US – if anything, there will be more closures, with Alcoa already slated to temporarily shutter its Intalco operation in Ferndale, Washington, in the next few weeks as it reviews its smelting portfolio. 

The energy-intensive nature of producing aluminium means that regions with low-cost hydroelectric power or natural gas have a natural advantage. The location of greenfield smelting capacity has shifted as a result, with low-cost producing regions such as the Middle East thriving along with Iceland, Norway, Russia and Canada.

Premiums and prices
What has pushed Century and Magnitude 7 to seek a reintroduction of Section 232 tariffs on Canada?

In its first-quarter results on April 30, Century said that aluminium prices had been badly hit by the demand destruction caused by Covid-19, but that prices of key inputs such as alumina and electricity had declined in its favor. It did not mention Canadian imports. 

It also said it was moving away from value-added products and producing more commodity-grade material, lowering the average premium it receives as a result. 

As customer order books worsen, other producers are starting to make this switch from billet to ingot. 

Alcoa has moved around 20% of its sales from value-added castings to commodity-grade products. Rio Tinto has also reduced the proportion of primary metal being produced as value-added products.

And what is the US Midwest P1020 premium doing?

On January 22, 2018 – the day that US Commerce Department Secretary Wilbur Ross delivered the Section 232 report on the impact of aluminium imports -Fastmarkets’ assessment of the aluminium P1020A premium, ddp Midwest US, was 10.25-10.75 cents per lb.

During March 2018, Section 232 import tariffs were formally imposed against aluminium and steel imports into the US at a rate of 10% and 25% respectively.

The premium more than doubled over the next several weeks, peaking at 22-23 cents per lb in April 2018. The current premium, assessed at 8-9.5 cents per lb on Tuesday June 9, has more than halved from 19-19.5 cents per lb on March 23, 2018, when Section 232 tariffs came into force.

So not only are aluminium prices lower, but producers have been forced to produce more ingot – and the premium for that product is lower too. 

The desire for a return to tariffs on Canadian imports along with the higher premium that provided a buffer to producers during the Section 232 period is perhaps better understood in this context.