Last week, the Department of Commerce released the reports accompanying the Section 232 investigations for both aluminum and steel products. The Department of Commerce initiated the investigations last April under Section 232 of the Trade Expansion Act of 1962, which grants the president the ability, along with his Department of Commerce, to determine whether certain imports are having an injurious effect on national security.
As reported last Friday on MetalMiner, the Department of Commerce proposed two alternative solutions for the alleged harm caused by a glut of aluminum imports. Both solutions seek to restore domestic aluminum production to 80% of capacity utilization. This data may not surprise readers, as the Section 232 steel investigation recommendations include three steel policy alternatives constructed on the same premise.
What MetalMiner found most striking about both report recommendations involves the goal of restoring both the aluminum and steel — stainless steel, too — industries to 80% capacity utilization rates.
The DOC believes an 80% capacity utilization rate reflects a healthy industry. By healthy, the Department of Commerce in the Section 232 steel report acknowledged that, “Industry analysts note that utilization of 80 percent or more is typically necessary for sustained profitability, among other factors.” Moreover the Section 232 report for steel suggested, “For most capital and energy-intensive U.S. steel producers, capacity levels of 80 percent or higher are required to maintain facilities, carry out periodic modernization, service company debt, and fund research and development.” (Sources cited in the Steel Section 232 report included Market Realist’s “Why steel investors are mindful of capacity utilization rates,” October 2, 2014.)
The aluminum analysis looks similar.
The aluminum report pointed to several factors as driving the need for the 80% capacity utilization rate. The DOC examined employment numbers, the dangers of overcapacity, declining R&D and fewer capital expenditures.
Of these arguments, some will seek to argue that employment is somewhat less important, as gains in efficiency and productivity could lead to a decline in employment. But clearly the overcapacity issue in general has forced all but Alcoa and Century Aluminum to declare bankruptcy. By poorer profitability, the industry will not effectively invest in R&D — because it can’t afford to — which will impact future military applications and capabilities.
Therefore, as with the steel industry, the 80% capacity utilization rate reflects a “healthy” aluminum industry with regard to profitability, efficiency and innovation.
Here is the National Security Argument
When steel and aluminum industries do NOT operate at 80% capacity utilization, the economic viability of the industry to produce materials in various war-time scenarios becomes tenuous. MetalMiner will cover this point more explicitly in our Section 232 steel analysis.
Certainly, when mills do not operate at healthier 80% utilization levels, the means to innovate and develop new products, improve production capacity and further increase efficiencies becomes more challenging.
The Department of Commerce included almost all downstream aluminum products in its recommendations.
However, the scope of the investigation does not include bauxite or alumina, or feedstock for the production of primary (unwrought) aluminum.
The investigation also does not include aluminum waste, aluminum scrap, aluminum powders and flakes.
(Editor’s Note: In the next part of this series, we’ll look at the domestic industry, other relevant findings and the potential impact on prices.)