Commentary

We tend to view the issue of China’s excess aluminum manufacturing capacity through the simple lens of its impact on the U.S. and European markets, but comments in a recent Aluminium Insider article show that the flood of low-cost aluminum from the People’s Republic of China is having a global impact.

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Markets like the U.S. and EU have mechanisms they can swiftly employ to counter a rising tide of cheap imports as the U.S. has shown, but some developing countries are still struggling months or years after western markets have already put some form of protection in place.

Despite repeated requests made to the government by some private sector primary aluminum producers like Hindalco and Nalco to impose anti-dumping tariffs on imports of primary aluminum and scrap, an Indian aluminum trade organization spokesman dismissed such claims as simply an attempt to profit by raising import prices.

What are We Agarwailin’ About? 

Anil Agarwal — a ‘patron’ of the Aluminum Secondary Manufacturers’ Association, according to AI, not the eponymous chairman of Vedanta Resources — is quoted as saying that the import of 17,000 metric tons in ingot and wire rod is so small in a market with a production capacity of 4 million metric tons, half of which is exported, that imports have a negligible impact on domestic mills. He is quoted as going on to challenge the notion that increasing scrap imports is undesirable, as suggested by many.

Referring to an increase of 29% over a three-year period, Agarwal noted imported scrap is typically used in automotive and detox applications where primary aluminum is cost-prohibitive. Rising scrap imports should be seen as a positive sign of the health of these industries rather than a worrying undermining of primary producers’ positions. Pointing to a 21% increase in primary metal exports between April and September of this year, jumping from 638,000 metric tons last year to 772,000 metric tons this year, he suggested Indian primary producers remained competitive in the international marketplace despite China.

The problem, though, is not just the excess Chinese downstream capacity but even more so of displaced capacity that had previously served the U.S. market (much like U.S. concerns over the health of the domestic downstream manufacturing sector), Agarwal raised concerns that India’s downstream semi-finished manufacturing capacity was under threat of substitution from cheap Chinese imports if action wasn’t taken.

Over the past seven years, imports of downstream products into the Indian market have grown at some 12% per year as a result of which the market share for imports as a percentage of domestic consumption has increased from 40% in 2011 to 60% now, a further article reports.

Whether India will impose anti-dumping or raised tariffs on China’s semi-finished aluminum products remains to be seen. Narendra Modi has his hands full with state elections at present that are not going well for him personally or his party, and do not bode well for upcoming national elections in the spring of next year. On the other hand, maybe picking a trade fight with India’s old adversary is just the sort of distraction he may welcome to divert attention.

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Correction: We were misled by the original Aluminium Insider article, which did not clarify the difference between the two Anil Agarwals, and thus we initially stated that the Agarwal mentioned in that article was indeed the Vedanta chairman – which he is not. Read their correction here.

Ed. note: Enjoy this timely dispatch from London by MetalMiner’s Editor at Large.

Not just Europe but the entire world was surprised at Britain’s decision following a referendum in 2016 to leave the EU.

At the time, the media was full of the story but in the interim we have all rather switched off as the negotiations have taken a tortuous route back and forth without appearing to make any progress. Brits have largely despaired that their government will ever come to a workable solution, an opinion reinforced last week when the latest (and according to the EU) final deal was presented to parliament, only for it to be roundly rejected and face the prospect this week of being formally thrown out if it is put to a vote.

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Now, even though Prime Minister Theresa May has just delayed a Commons vote for the plan that was originally scheduled for tomorrow, the prospect of Brexit is not some far-off threat; come the end of March, the UK formally leaves the EU and — whatever happens — will have to accept a new form of relationship with its neighbors.

The questions is, how will we get there at this point?

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The December Aluminum Monthly Metals Index (MMI) held steady this month at 88.

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LME aluminum prices also fell in November. Aluminum prices appear weaker this month. However, prices have increased so far in December.

Source: MetalMiner analysis of FastMarkets

From last July until November, LME aluminum prices traded in the $1,970-$2,170/mt level. However, prices moved slightly below the $1,970/mt floor in November.

The politics of trade and financial uncertainty in China, rather than supply and demand in the aluminum market, have moved LME price levels.

Rusal Aluminum Market

Russian aluminum giant Rusal’s aluminum profits continue to rise while sanctions continue to get postponed, this time from Dec. 12 to Jan. 7.

Rusal primary aluminum production reached 940,000 tons in Q3, 1% higher year on year. Primary aluminum and alloys sales increased by 8.1% year on year to 1.05 million tons. Rusal aluminum exports increased by 4% in October compared to September.

China Alumina Market

According to the president of Aluminum Corp of China Ltd, alumina exports held steady in October. Chinese aluminum makers have exported unusually high alumina volumes in 2018 due to supply constraints.

Alumina tightness came as a result of the strike at Alcoa’s operations in Western Australia, the outage at the Norsk Hydro Alunorte alumina refinery and U.S. sanctions on Russia’s United Company Rusal.

September alumina exports were five time higher than August, rising to over 165,000 tons. The higher numbers come on the heels of advanced production in September-October before the winter cuts (Nov. 15-March 15).

However, unlike last year, Chinese production in 2018 will not have blanket requirements for 30% output cuts.

SHFE aluminum prices also fell this month, hitting their lowest level since October 2016. Current prices have fallen 13% from the beginning of 2018. SHFE trading volumes fell 37% from this time last year, which means buyer sentiment — and, therefore, prices — have fallen.

Source: MetalMiner analysis of FastMarkets

However, SHFE aluminum prices traded similarly to LME aluminum prices and increased so far in December.

U.S. Domestic Aluminum

The U.S. aluminum Midwest Premium has traded sideways in December.

The current price stands at $0.18/pound, the same level as November, and lower than the $0.20/pound level in April-May 2018. Despite the sideways trend, the current premium remains high.

Source: MetalMiner data from MetalMiner IndX(™)

What This Means for Industrial Buyers

LME aluminum prices appear weaker at this point. Tariffs, sanctions and supply concerns may act as a support to aluminum prices, both for LME aluminum and the U.S. Midwest Premium.

Adapting the right buying strategy becomes crucial to reducing risks.

Only the MetalMiner monthly outlooks provide a continually updated snapshot of the market from which buying organizations can determine when and how much to buy of the underlying metal.

For more information on how to mitigate price risk year-round, request a free trial to our Monthly Metal Buying Outlook.

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Actual Aluminum Prices and Trends

Aluminum prices fell this month, with a closing price in November of $1,950/mt.

Meanwhile, Korean commercial grade 1050 sheet increased by 3.96% to $3.41/kilogram after last month’s downtrend.

Chinese aluminum primary cash prices increased by just 0.28%, while Chinese aluminum bar fell by 1.63%. Chinese aluminum billet prices also decreased, down 3.13% this month to $2,042/mt.

The Indian primary cash price rose by 1.02% to $1.98/kilogram.

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Price forecasters are always looking out for apparently unrelated factors that correlate to the price movement they are tracking.

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Sometimes the relationship seems bizarre.

At first sight, a link between oil prices and aluminum prices appears tenuous until you consider that the oil price is taken as a proxy for energy prices in general, particularly as fuels like liquefied natural gas (LNG) can be linked to the crude oil price.

So, here is one for you. If you would like a leading indicator to price movements for coal, steel and energy-intensive base metals, the South China Morning Post suggests, or at least links, pollution levels in major Chinese cities to production levels of steel and aluminum.

According to the argument, if pollution levels are high it is because production is high, and if production is high then the market is going to be oversupplied and prices will fall.

The South China Morning Post compares pollution levels this year to last around Beijing and other major eastern seaboard cities. Last winter, local government officials in Beijing restricted — or simply banned — the burning of coal across much of northern China, the article reports. Consequently, in early December average pollution levels in Beijing were less than half the concentrations seen in the previous two years.

Beijing’s citizens no doubt welcomed the blue skies. Unfortunately, coal is not just used as an energy source for electricity generation — it is also burned as fuel by millions to heat their homes, workplaces and schools, the South China Morning Post reports.

With industry slowing and reports of school children facing hardship, Beijing relented, and by late December to early January, the smoke had returned.

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On Monday, miner Rio Tinto announced it had made the first shipment of bauxite from its Amrun mine in Australia, six weeks ahead of schedule.

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According to a company announcement, the $1.9 billion investment in the Amrun mine serves to replace production from the depleting East Weipa mine. The Amrun mine is expected to hit its full production rate of 22.8 million tons next year.

“Bringing Amrun online further strengthens our position as a leading supplier in the seaborne market. We have the largest bauxite resources in the industry and are geographically well positioned to supply China’s significant future import needs, as well as supporting our refinery and smelting operations in Australia and New Zealand.

“The Amrun mine will ensure generational jobs for Queenslanders and build significantly on our 55-year history on the Western Cape.”

The first shipment was hailed in a ceremony on the Western Cape York Peninsula, seeing the more than 80,000 tons of bauxite off to Rio Tinto’s Yarwun alumina refinery in Gladstone.

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Rio Tinto, the world’s largest bauxite producer, produced 50.8 million tons of bauxite last year. Bauxite ore is the world’s main source of aluminum. Bauxite is refined into alumina, which is then refined into pure aluminum.

According to the U.S. Geological Survey, global bauxite production hit 300,000 tons in 2017.

The miner’s announcement came after last week’s announcement of a $2.6 billion investment in the Western Australia Koodaideri iron ore mine, which the miner said will be its “most technologically advanced mine” once completed.

According to a Rio announcement, construction on the mine is set to begin next year, with production expected to begin in late 2021. The mine is expected to have an annual capacity of 43 million tons.

“Koodaideri is a game-changer for Rio Tinto,” Rio Tinto chief executive J-S Jacques said. “It will be the most technologically advanced mine we have ever built and sets a new benchmark for the industry in terms of the adoption of automation and the use of data to enhance safety and productivity.”

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This morning in metals news, U.S. steel production through Nov. 24 was up 5.6% compared with the same period last year, copper prices fell back Tuesday and Ford’s November U.S. sales were down.

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U.S. Steel Production

According to a recent American Iron and Steel Institute (AISI) report, U.S. steel production for the year (through the week ending Nov. 24) was up 5.6% compared with the same time frame in 2017.

For the period through Nov. 24, the U.S. produced 85.6 million tons at a capacity utilization rate of 78.1%, up from 81.1 million tons at a 74.2% rate last year.

For the week ending Nov. 24, the U.S. saw 1.9 million tons of production at a rate of 81.3%, up from 1.7 million tons at a 73.3% rate for the same week in 2017.

Copper Prices Fall

After making gains Monday, copper prices fell back Tuesday, according to a Reuters report.

Three-month London copper dropped 0.2% Tuesday, while the most-traded SHFE contract fell 0.7%, according to the report.

Ford November Sales

November proved to be a down month for Ford in the U.S. market.

The automaker’s November sales were down 6.9% year over year, with 196,303 units sold.

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Even truck and SUV sales slumped, down 2.3% and 4.9% year over year, respectively.

U.S. aluminum maker Century Aluminum announced last week it plans to expand production at its smelter in Sebree, Kentucky.

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The Sebree smelter — one of two Century Aluminum smelters in Kentucky, the other in Hawesville — has an annual production capacity of 220,000 tons.

Last week, the company announced its expansion plans would be completed by the end of the first quarter of 2019. According to the company announcement, the expansion includes the addition of 90,000 metric tons of billet production and 20,000 metric tons of additional secondary capacity.

As a result, the Sebree smelter is expected to produce 230,000 metric tons of aluminum in 2019, which includes 175,000 metric tons of billet.

In a prepared statement, President and CEO Michael Bless touted the “positive effects” of the Trump administration’s Section 232 tariffs.

“These new expansion programs demonstrate our confidence in the future of the U.S. aluminum industry and the continued positive effects of the Trump administration’s Section 232 program,” Bless said. “With the 150,000 MT restart of Century’s Hawesville smelter nearing completion, we are now able to continue to reinvest in our plants to increase value-added production and enter the expanding secondary market.

“These programs, along with the previously announced technology improvement program at Hawesville, should ensure the continued competitiveness of these plants well into the future.”

The Sebree smelter employees 515 people. Bless added as a result of the expansion, the Sebree smelter will see an addition of “nearly 50 new employees.”

In October, Century Aluminum reported third-quarter financial results, posting a net loss of $20.3 million, in part attributable to developments at Sebree.

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“Third quarter results were negatively impacted by $9.2 million related to lower of cost or net realizable value (“NRV”) inventory adjustments, $16.9 million related to the equipment failure at Sebree, and $1.7 million related to the Sebree labor agreement signing bonus,” stated in its third-quarter earnings release.

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This morning in metals news, Norsk Hydro sees global aluminum demand picking up 2-3% next year, the Office of the United States Trade Representative (USTR) released a statement on China’s automotive tariffs and Steel Dynamics shares bounced back from a 14-month low.

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Aluminum Demand in 2019

Norwegian aluminum firm Norsk Hydro says aluminum demand is expected to tick up 2-3% in 2019, featuring a continued deficit in the market.

In addition, President and CEO Svein Richard Brandtzæg commented on the situation at Hydro’s Alunorte alumina smelter in Brazil, as it aims to return to full capacity there after running at 50% for nine months.

“We are aiming to establish a common platform with authorities and the court system to have an aligned way forward towards full production, utilizing the best available technology,” Brandtzæg said. “We have what it takes: the right people, the right technology and the right spirit.”

MetalMiner’s Take: Norsk Hydro’s announcement that aluminum demand is expected to rise by 2-3% in 2019 is conservative.

Demand has been rising at 5-6% since the financial crisis and Norsk Hydro’s lower numbers reflect a slowing global economy, which might be hard for those in the more buoyant U.S. to grasp. However, the rest of the world, though growing, is doing so at a slower pace than in recent years.

The issue for the aluminum price has not been lack of demand but surplus of supply. Irrespective of reports the world outside China is in deficit, exports of semi-finished products from China have more than made up for the Western world’s shortfall in primary metal. This is despite the LME forward curve providing sufficient incentive for the stock and finance trade to roll forward maturing contracts — Chinese exports are keeping the market amply supplied.

Lighthizer: China’s Automotive Tariffs Are ‘Egregious’

The USTR released a statement Wednesday commenting on China’s tariffs on U.S. automobiles, a couple of days before the G20 summit is scheduled to begin in Buenos Aires.

“As the President has repeatedly noted, China’s aggressive, State-directed industrial policies are causing severe harm to U.S. workers and manufacturers,” USTR Robert Lighthizer said in a release. “We are continuing to raise these issues with China. As of yet, China has not come to the table with proposals for meaningful reform.

“China’s policies are especially egregious with respect to automobile tariffs. Currently, China imposes a tariff of 40 percent on U.S. automobiles. This is more than double the rate of 15 percent that China imposes on its other trading partners, and approximately one and a half times higher than the 27.5 percent tariff that the United States currently applies to Chinese-produced automobiles. At the President’s direction, I will examine all available tools to equalize the tariffs applied to automobiles.”

MetalMiner’s Take: Lighthizer’s comments come at an interesting time — just before the G20 summit in Argentina.

Most trade agreements between countries do not include equal duties across categories of goods. The U.S. exports about 250,000 automobiles annually to China, while the U.S. imports only about 50,000 vehicles from China.

More likely, this announcement creates additional negotiating power for the Trump administration as it seeks to extract concessions from China, in general, over Section 301 tariffs, Section 232 and the trade deficit with China.

Steel Dynamics Bounces Back

Earlier this week, Steel Dynamics announced plans to build a new electric arc furnace (EAF) flat roll steel mill, expected to be located in the southwestern U.S.

According to a company release, the mill is expected to have an annual capacity of 3.0 million tons.

“The current estimated investment is $1.7 billion to $1.8 billion, with anticipated direct job creation of approximately 600 well-paying positions, and numerous opportunities for indirect job growth from other support service providers,” the release stated.

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Even so, the company’s share price plunged 9% Tuesday. However, Wednesday afternoon it jumped 3.2%, off of a 14-month low, following a congratulatory tweet by President Donald Trump, per a MarketWatch report.

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Reading like Tolstoy’s “War and Peace,” an epic article in The New York Times explores the background and history of Oleg Deripaska’s battle to initially gain acceptance in the West and, later, to save his companies — notably Rusal and its holding company En+ — from potentially bankrupting U.S. sanctions.

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What comes across strongly from the article, whether you necessarily feel The New York Times has a political point to make or not, is that acceptance in Western capitals and among the Western business elite can be bought via lobbyist and media firms.

Deripaska has spent tens of millions over the last few years trying to buy his way into a position where he is recognized as a respectable businessman and reputable member of the global business community. To its credit, Washington has been the standout obstacle to his campaign to gain visa-free travel and recognition.

While U.S. lobbyists, senators and businessmen have been paid millions on his behalf, successive administrations of both political hues have resisted the pressure to give him unfettered acceptance.

At heart, this is down to deep misgivings about how he came about his vast aluminum empire, his reported links to organized crime and his undoubted closeness to the current Putin administration.

While the details of Deripaska’s reportedly sordid past make interesting reading, into which The New York Times goes into considerable detail, of more interest to our readers is the likely fate of sanctions against Rusal and any minority shareholdings En+ holds in other downstream aluminum companies (which have been causing no end of problems this year, disrupting aluminum supplies and causing price volatility).

The upshot of The New York Times’ view is that the successful hiring of an army of lobbyists and repeated delays in applying the threatened sanctions points to the probability they will never be applied.

The current, several times postponed, end date is Dec. 12, but both the market and political observers are of the view this date too will pass without any sanctions being applied, despite the fact Deripaska has not sold down his shareholding in En+ or relinquished real control of his aluminum (and nickel) empire.

For aluminum consumers, that is good news — we don’t need to remind anyone of the price spike earlier this year that resulted from the initial announcement of the sanctions.

The aluminum price is currently languishing below the level it was prior to the sanctions announcement and subsequent price spike, suggesting the market is totally sanguine about any chance of sanctions actually being applied. The resulting disruption to the supply chain following the announcement of sanctions seems to have sent a reality check to Washington that has been heeded and every effort has been pursued to reach a compromise of saving face while also avoiding a repeat.

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The chances are “sufficient evidence” will be found that Deripaska has stepped back from day-to- day control to justify a shift of focus from En+ and Rusal as investment vehicles to Deripaska as an individual.

In a tight aluminum market, that’s just what consumers will be looking to hear.

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Criticism of Donald Trump’s tariff action, particularly by archrival Sen. Elizabeth Warren, is too often cast as simply political maneuvering, but there is a very real issue underpinning this current argument. That is, to be successful tariffs need to block imports and support domestic production — otherwise, what’s the point?

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Unfortunately, the consequences of tariffs are not that simple.

Some domestic mills will object to imports of certain products on the grounds that they manufacture the same product. But as my colleague Lisa Reisman pointed out so eloquently in a recent post last month, quality comparisons are analogous to the quality of your steak joint: they all serve meat, but what do you want a Peter Luger or Ponderosa?

CNBC reports Warren’s criticism of the tariff waiver program, citing research done by her staff, that foreign-headquartered companies received more than 80% of all exemption requests (of 909 decisions posted by the Commerce Department in the first 30 days after the tariffs were announced).

The majority of waivers — almost 52% — went to Japanese-owned companies, and overall 84% of their requests were approved, the article states. The implication being the waiver program is in crisis and exemptions are being granted in favor foreign firms, undermining the objectives of the tariff program.

By way of background perspective, CNBC reported that as of of Oct. 29, 43,634 steel and 5,667 aluminum exclusion requests have been filed. Overall, 15,662 steel exclusion decisions have been posted (and 11,281 were approved), while 905 aluminum decisions have been posted (and 763 approved).

Yet, as Reisman pointed out, not all grades are equal, even if they are nominally manufactured to the same standard.

Taking her example, grain-oriented electrical steel (GOES) manufactured by a Japanese mill is superior, you cannot fault consumers for applying for tariff exemptions if the domestic product is below global standards. Of course, GOES and Japanese material in particular, is arguably a unique example (it is hardly vanilla HRC).

From a quality perspective, it is easy to understand why Japan has more exemptions than other countries: they simply make grades and materials that are not produced elsewhere in the world.

So, the number of exemptions by country doesn’t tell a complete story. By comparison, Turkey is having a tougher time because their products are, to put it bluntly, lower on the food chain and there are undoubtedly many top-quality producers in the U.S. of comparable material.

What does require further investigation, though, is why firms based in the U.S. but with foreign headquarters — essentially, subsidiaries of overseas firms — should be more successful than domestic consumers in achieving waivers.

As this graph from the Financial Times shows, Japan and Thailand have been by far the most successful in achieving waivers.

While material from Japan and Thailand has been the most successful, imports from Turkey, Canada and Brazil have been among the least successful.

There have been 135 requests decided for tariff exclusions for imports from Turkey, 32 from Canada and 23 from Brazil. The administration has granted just one request for Turkey, none for Canada and none for Brazil, the Financial Times reports.

These figures in themselves, though, do not explain why foreign-owned subsidiaries have had greater success in achieving waivers than U.S.-owned businesses.

The Commerce Department accuses Warren of misunderstanding the process — it wouldn’t be the first time a politician misunderstood a piece of legislation — but you would hope she was receiving expert advice, so let’s assume she has it right. If that is the case, the Commerce Department has a case to answer, and an audit is apparently underway.

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If these tariffs are to achieve the desired effect and if they are to be worth the cost to American firms and consumers (Ford Motor said it expects the steel and aluminum tariffs to cut $1 billion from its profits by the end of next year), then waiver decisions cannot be made in an arbitrary manner. These decision should work to an overall strategy that furthers the president’s aims, rather than hinders them.