Stop-start revival of US aluminium sector post tariffs is still a revival

Molten aluminium sits in a cradle at a smelting plant. Chinese producers seem to be riding hgh. Bloomberg

It's been three months since US President Donald Trump announced the imposition of 10 per cent tariffs on US imports of aluminium.

It's been three weeks since he removed temporary tariff exemptions on imports from key allies, including Canada, the largest supplier of aluminium to the United States.

The winds of trade war are blowing ever harder. European Union counter-duties on US goods kicked in on Friday

But the Trump administration will take some comfort from the fact that the tariffs are achieving their stated aim, namely the revival of the country's dormant aluminium production capacity.

It's going to be a slow process, literally stop-start in the case of Alcoa's Warrick smelter in Indiana.

And it's not going to reverse years of shrinkage in the US production base. Alcoa has also just announced the dismantling of a long idled potline at its Wenatchee plant in Washington.

However, the needle on the dial has started moving in the direction of the administration's target of a national operating rate of 80 per cent of capacity. The only problem is that this slow revival risks being overshadowed by a boom in exports from China, the country everyone other than the Trump administration views as the core threat to the rest of the world's aluminium sector.

The US produced 785,000 tonnes of primary aluminium last year, with a little over 1.1 million tonnes of production capacity idled.

Some of that latent capacity is now being restarted.

Alcoa announced in July last year it was reactivating three lines with capacity of 161,400 tonnes per year at its Warrick smelter. The process was due to be completed this quarter but one line with capacity of 50,000 tonnes per year has been taken down again after a late-May power outage.

Aluminium smelting requires an uninterrupted flow of power to keep the metal in a molten state as it is purified. Unexpected outages can cause damage to the plant itself, which is why Alcoa moved quickly to close it.

Two steps forward, one step back.

As is also the case with Century Aluminum.

It is refiring one 50,000-tonne per year line at its Hawesville smelter in Kentucky, the company told analysts on its Q1 results call.

Another two lines with combined capacity of 100,000 tonnes per year are awaiting restart, with Century guiding towards full Hawesville capacity in the second half of next year. However, the company has just taken down one of three production lines at its Sebree smelter, also in Kentucky, after an "electrical failure".

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It will take around three months to restore fully the line, although the loss to production should be less than 18,000 tonnes, it said.

The only other primary aluminium player in the US, the Swiss-owned Magnitude 7 Metals, said in March it intended to restart two lines at its New Madrid smelter in Missouri, with no update since then.

Even if all this capacity returns, however, it won't turn the dial back on the US aluminium smelter clock.

A reminder of how long the decline has been running came from Alcoa, which announced it will close one line "permanently" at its Wenatchee smelter The last time that particular line produced any aluminium was in 2001. The remaining three lines at Wenatchee are still idle.

While the Trump administration's tariffs coax dormant smelter capacity back into life, they have no impact on the world's largest producer.

China exported around 437,000 tonnes of aluminium in semi-manufactured form ("semis") last month, the second-highest total ever.

"Around", because one of the first casualties of global trade hostilities appears to have been the monthly breakdown of China's commodities imports and exports.

However, an estimate of "semis" export flows can be calculated from the preliminary figures by deducting the relatively small and stable outbound flow of unwrought metal, both primary and alloy.

Shining through the statistical clouds is one very clear trend. Exports of "semis" are rising fast. They were up around 14 per cent on last year in the first five months of 2018 and the cumulative total of 1.98 million tonnes is a record.

In part this is also down to the Trump administration. Its sanctions on Russian oligarch Oleg Deripaska and his Rusal aluminium empire sent the aluminium price soaring in April. The resulting arbitrage window has incentivised Chinese product makers to lift exports to unprecedented levels.

In part, though, rising exports are simply a reflection of China's continuing aluminium ascendancy.

The country's national run-rate accelerated by around 780,000 tonnes to an annualised 36.4 million tonnes over the course of January-May, according to the International Aluminium Institute, using its new methodology. Production is recovering from the mandated winter heating season curtailments and new capacity is still coming online even as the authorities try and force out "illegal" capacity.

China's aluminium smelter sector is experiencing its own turbulence as it experiences Beijing's "structural reform" processes. But China's share of global production has been creeping higher again. It was just under 57 per cent last month.

China, it's worth reiterating, does not export aluminium in primary metal form.

Years of vertical integration, though, have made it the dominant producer and exporter of metal in first-stage fabricated form.

The more "semis" China exports, the greater the displacement effect on demand for primary metal everywhere else.

In a global market the effect is to pressure the global aluminium price.

Even tariffs only partially shield against these structural mega-trends, given the United States' continued import dependency both at primary metal and product level of the value chain.

China was still the largest supplier of aluminium "semis" to the US last year despite a rising wall of product-specific anti-dumping duties.

When it comes to aluminium, the Trump administration's focus is going to remain firmly on the dial of national production capacity utilisation.

The rest of the world's focus, though, is going to remain firmly on how much aluminium is coming out of China every month.

No change there, then.

Reuters