INTL AL CONF: Dialogue not tariffs will resolve China overcapacity, industry execs say

A global dialogue intended to resolve the issue of overcapacity in China’s aluminium production would be better for creating a fair global market than the imposition of tariffs, a panel of industry experts has said.

Speaking at Metal Bulletin’s 33rd International Aluminium conference in Berlin this week, panelists noted that the Section 232 tariffs – imposed in June by the United States on aluminium imports from Canada, Mexico and the EU – had had little effect on Chinese supplies.

“From an Alcoa standpoint, tariffs would not be our preferred method,” Tim Reyes, the president of Alcoa Aluminum, told the conference.

“Certainly, applying tariffs to trade partners – specifically Canada, which the US relies on considerably – does not seem to be the appropriate way to address the issue, which is really Chinese overcapacity,” he added.

“We [would] prefer to see more of a global discussion related to overcapacity, to make an attempt to level the playing field for all participants in the market, and start to really address [the issue that] the industry consensus shows is the real problem,” he said.

Net exports from China have not slowed down as a result of the tariffs, Reyes said, and such material continues to move into the market, especially to Southeast Asia and the Asian market, in the form of coils for remelting.

Reyes also highlighted concerns that products made using materials that should be subject to the Section 232 duty could be imported into the US under codes that do not fall into the tariffs.

“That’s where you start to see destruction of demand,” he told delegates. “We have to watch the trade flows. We don’t see a significant effect today, but we’re watching some specific items where we think that could be the case.”

According to Dick Evans, chairman of Constellium, the tariffs favor semi-fabricated and value-added production in China, and make material costs in China less expensive.

“Now, the question is what happens with that excess capacity. There’s already huge excess capacity for rolling in China,” Evans said.

“There will be a lot of push from Chinese semi-fabricated producers to find markets, and Europe is probably [seen] as a potential market, along with other parts of Asia. How Europe and others respond will affect the semi-fabricated products industry in China,” he added.

If this happens, Evans expected there to be pushback from Europe, which has traditionally taken a more protectionist approach.

“There’s residual expertise in the EU for how to deal with that. If [Chinese exports] become a threat, I’d expect to see protective activity because there has been a lot of investment in European capacity as well,” he said.

Targeted schemes
The issue of Chinese overcapacity is not new. For several decades, the East Asian country’s government has initiated a series of programs targeting specific areas, ranging from replacing outdated smelting technology to eliminating capacity operating without licenses.

But for every old smelter taken out of operation, newer and much larger ones have sprung up in their place.

“That’s why we have come to this point, where the US has imposed tariffs, because the industry was pushing to have governments do something to try to get rid of illegal subsidization, which was creating overcapacity,” Constellium’s Evans said.

“Then, of course, it exploded into the tariffs, which totally dispersed the focused effort of trying to solve the China problem, and have been counter-productive in that regard,” he added. “I share the hope but think it will take concerted effort from the US, Europe and other parts of Asia to [achieve] some kind of commitment on this problem.”

Panelists in Berlin said that the World Trade Organisation is probably not the correct forum in which to resolve the trade situation, however. According to Evans, it lacks critical support among its membership, making the solution more likely to be found in bilateral negotiations between the US and China, and between the EU and China.

“Aluminium gets lost in the shuffle when you start bringing in electronics, the tech sector, intellectual property, and so on,” he said. “One of the challenges aluminium has is whether it will get due consideration or will be traded off against other issues.”

But while the environmental pressure is there to reduce capacity in high-polluting industries such as aluminium, the problems of job creation and sustainability of communities in western China, where smelters are located, “is a very big concern for Chinese authorities, so they will probably continue to [sit on] the fence,” according to Jean-Baptiste Lucas, chief sales & marketing officer for global aluminium at Vedanta.

“That being said,” Lucas added, “China [played its part] last year, so we can hope it will do the same this year, but that is heavily linked to the economic performance of those smelting areas.”

Lucas noted that China’s VAT rebate was effectively a subsidy, adding that it was “quite ironic to fight subsidies with subsidies.”

“Those duties are subsidies,” Lucas said. “They are protecting non-performing assets, they are distorting the market, and they’re creating confusion in the pricing system, which is already complex for some of our customers. We’ll still see growth in demand because the value proposition in aluminium is so compelling, but it’s not a good way to handle overcapacity.”

The integration and inter-dependence of the US-Canada aluminium sector makes the application of tariffs challenging. One-third of all aluminium consumed in the US is supplied by Rio Tinto, and its vice president of sales & marketing told the conference that it hopes that common sense will ultimately win.

“From a customer standpoint, demand is still there. Aluminium is a young material,” Tolga Egrilmezer said.

“Canada’s smelters have been built to complement the US industry,” he added. “It’s extremely integrated, whether in the defense, automotive or downstream industries, so there many movements between the countries. In the end, we’ll take a big breath and hope that common sense will prevail, but we’ll focus on our customers.”

Also adding to the uncertainty in aluminium currently is whether sanctions against several Russian individuals and companies, including UC Rusal, will take full effect on October 23 after the end of a grace period allowed for US customers to wind-down business.

“We really don’t know – that’s the answer. It is a very live issue,” Rio Tinto’s Egrilmezer said.

“As an industry, it has been a turbulent few months. From a Rio Tinto standpoint, of course, we’ll comply and we’re doing all the right things in the interim period to make sure we’re ready and that there are no significant disruptions, but if this changes we’ll reassess it again,” he added.

Continuation of sanctions depends on the results of the mid-term elections to the US Senate at the start of November, panelists said.

Constellium’s Evans said that there are three potential outcomes.

First, if the Republican Party holds a majority in both the Senate and the lower House of Representatives, then there will probably be more receptivity to changing sanctions. Second, if the opposing Democratic Party wins both houses, “a real political food fight” is likely, with more severe sanctions possible. Third, if the Democrats win just the House but not the Senate, there will be more of a stalemate.

The last of these is “probably the most likely scenario, and it would indicate less significant movement in either direction,” Evans added.

The effects of the announced sanctions are already being felt, however, something that the industry did not really expect.

“The reaction of the markets after the initial announcement shows the potential effect and also how integrated the global aluminium-alumina-bauxite supply chain really is. It affected upstream, and customers which rely on Rusal as one of their supply sources,” Alcoa’s Reyes said.

“That’s probably something that was very much underestimated at the time, and the continued delay, or pushing out the resolution again and the reaction of the markets, tells you a lot about what people are anticipating in terms of how this is going to be resolved – and including the fact there’s a mid-term election coming up,” he added.

Alcoa started its contract negotiations for 2019 earlier because of this uncertainty, he told the conference, due to clients’ desire to lock-in future supplies.

“Anything is possible – expect the unexpected,” Vedanta’s Lucas said.

“The range of options that everyone is considering is much broader than at the beginning of the year, and people don’t want to get caught twice. They are making scenarios and assessing different options,” he added.

“Nobody knows, but whatever the outcome, people are trying to be ready and are assessing many options, which is why the supply chains will all change regardless of the outcome, because most customers want to be cautious,” he said.

Global aluminium premiums moved in differing directions in the week ended September 11, with discussions continuing at Metal Bulletin’s conference.