(Editor’s Note: This is the second part of our series covering the recently released Section 232 aluminum report. In case you missed it, you can find Part 1 here.)
Domestic Aluminum Industry
The aluminum industry has three main steps according to the production process:
- Upstream, or primary or unwrought production.
- Downstream, which consists of processing aluminum into semi-finished aluminum goods (such as rods, bar, sheets, plates, castings, forging and extrusions). The U.S. is the second-largest aluminum producer, just behind China.
- Secondary production, or production based on recycled scrap. The U.S. is the world’s leading producer of secondary unwrought aluminum. Therefore, secondary production is not the focus of the Section 232 report.
The Department of Commerce revealed several findings in its analysis. The following help justify the 80% capacity utilization rate arguments:
- Aluminum is essential to U.S. national security. In 2016, the U.S. imported more than 90% of the primary aluminum consumed. Therefore, total reliance of imports cannot provide an assured supply of aluminum.
- Imports and global aluminum production overcapacity caused by foreign government subsidies (such as China) have had a negative impact on welfare and production capacity of the U.S. Examples of this negative impact include: declining employment, poor financial status of the U.S. aluminum industry and reduction of R&D expenditures.
- Domestic aluminum production capacity continues to decline. According to 2016 data, the U.S. produced 840,000 metric tons, becoming the sixth-largest aluminum producer in the world while ranking as the fourth-largest consumer.
- Aluminum is a highly energy-intensive industry (based primarily on gasoline prices). Therefore, competitive advantage goes to those who can produce in countries with lower energy costs (such as the U.S.). China, however, according to 2016 data, appears much less competitive than the U.S. based on energy costs. The cost of electricity in China was $614/mt versus $532/mt in the U.S. per metric ton. See our analysis here of the cost to produce one ton of aluminum.
- Regarding the capacity utilization rate, in 2016 the U.S. industry operated at a 48% capacity utilization rate. Meanwhile, in 2017, the only two aluminum (upstream) producers in the U.S., Alcoa and Century Aluminum, operated at a 43% capacity utilization rate as measured in November 2017. Domestic production remains well below demand. In 2016, global primary aluminum consumption was 59.7 million metric tons (an increase of 5.4% year over year). China had 53% of global consumption, the U.S. represented 9% and Germany 4%. Chinese consumption remains well below its production level, while U.S. production is substantially lower than consumption.
- U.S. imports of aluminum have increased while exports decreased. Imports increased by 34% in 2016 on a weight basis compared to 2013 levels. For the first 10 months of 2017, imports ran 18% above 2016 levels on a tonnage basis. Primary aluminum (unwrought) represents 63% of the total by value. The second-largest category (aluminum plates, sheets, and strips) accounts for an additional 19% of imports.
- Aluminum imports coming from other regions have also harmed the aluminum industry. Aluminum bars, rods and profiles coming from Vietnam have increased by over 800% between 2013 and 2016, with the trend continuing in 2017. A portion of the imports in this category from Vietnam are likely circumvented Chinese products trans-shipped to avoid duties.
- Meanwhile, U.S. aluminum exports decreased over the 2013-2016 period. Also, for the first 10 months of 2017, U.S. exports showed a slight decrease in numbers, falling by 8%. U.S. exports go mainly to North American Free Trade Agreement (NAFTA) partners and neighboring countries.
Potential Impact on Prices
Neither the long- or the mid-term picture for aluminum prices will likely see much of an impact from the Section 232 investigation and report, as the market had already anticipated the results.
Prices in the short term, however, might, find some support.
Even without a Section 232 outcome for aluminum, aluminum prices remain bullish and the long-term trend may continue.
Meanwhile, President Trump has yet to determine the extent of these measures. The U.S. aluminum industry will not add additional aluminum production capability until idled capacity is restarted, which takes around 9 months.
Therefore, LME aluminum prices may suffer some short-term price fluctuation, but will then trade again according to the current market trend, which is bullish, until markets receive more clarification.