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COLUMN-Trump's tariff wall breached by rising tide of aluminium: Andy Home

Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters.)

* U.S. aluminium production: https://tmsnrt.rs/35CJ8qF

By Andy Home

LONDON, May 7 (Reuters) - It's two years since U.S President Donald Trump imposed 10% tariffs on imports of aluminium, citing national security concerns.

The stated aim was to provide a lifeline to domestic producers struggling against low prices and repeated waves of cheap product imports.

Things aren't panning out too well.

Don't take my word for it. Take the word of the four U.S. lawmakers who have just written to Trump, warning, "it is clear that your current policies are not working".

"President Trump got us into a trade war and the United States is not winning," said Representative Suzan DelBene, whose district is home to Alcoa's Ferndale aluminium smelter.

Alcoa has just announced it is placing the plant on care and maintenance, a major blow for an administration that set itself the target of lifting aluminium production to at least 80% of domestic capacity.

Imports of aluminium products, meanwhile, are still rising amid a dysfunctional exclusions system and the elephant in the room, China's massive overcapacity, simply grows bigger.



PRODUCTION BOUNCE FADES

Alcoa will curtail 230,000 tonnes of operating capacity at the Washington State smelter. Part of the plant, which has a capacity of 49,000 tonnes, has been idled since 2010, a reminder of how long U.S. producers have been in the survival business.

The smelter is "uncompetitive ... amid declining market conditions", the company said.

The London Metal Exchange (LME) aluminium price hit a four-year low of $1,455 per tonne in April and is still under pressure at a current $1,485.

Like other industrial metals, aluminium is reeling from a COVID-19 demand shock after key end-users such as automotive manufacturers shut down operations around the world.

Unlike other metals, however, global aluminium production has been largely unaffected by national quarantine measures, rising by 2% over the first three months of 2020.

The resulting low-price environment is once again taking its toll on higher-cost operators such as those in the United States.

The New Madrid smelter was a poster-child for Trump's aluminium tariffs, its new owners Magnitude 7 Metals resuscitating it from bankruptcy. Today, the Missouri plant is "in prayer mode", according to chief executive Charles Reali.

Century Aluminum, the country's third biggest operator, is holding the line on run-rates but moving "our product mix to a higher proportion of standard products" due to falling orders from customers, chief executive Michael Bless said, commenting on the company's first-quarter results.

U.S. primary aluminium production rose from 741,000 tonnes in 2017 to 1.13 million tonnes last year. But the tariff bounce has evidently run its course with the number of operating plants falling back to just six after the Ferndale curtailment.

And maybe fewer still if the price doesn't pick up soon.


IMPORTS, EXCLUSIONS AND PHANTOMS

Tariffs have done nothing to reduce U.S. import dependency. They never could. Even if every idled smelter were brought back into operation, the country would still need more metal.

Imports of primary aluminium were steady last year at four million tonnes, down by just 86,000 tonnes from 2018, according to International Trade Centre figures.

Imports of aluminium in semi-manufactured form actually increased, particularly those of plate, sheet and strip, which surged by 12% to 1.30 million tonnes.

Aluminium is melting through the tariff wall.

Although only four countries are exempt from tariffs - Canada, Mexico, Australia and Argentina - importers can seek product-specific exclusions from the Department of Commerce.

The exclusion process seems to have run out of control.

"The Commerce Department has granted tariff exclusions for huge volumes of aluminum can stock, plate, sheet, foil and other products - far exceeding historical import volumes and U.S. market demand," according to industry body the Aluminum Association.

The U.S. market for can-sheet, for example, is about 3.8 billion pounds per year but almost 5.0 billion pounds of exclusions have already been granted for 2020.

Not only are aluminium consumers incentivised to source tariff-free imports but they are leveraging the high volumes of exclusions granted to negotiate lower prices with domestic producers.

"U.S. aluminum manufacturers are now competing with both real and phantom imports," according to Lauren Wilk, vice president for policy and international trade at the Aluminium Association.

With ever more metal breaching the tariff wall, the U.S. aluminium sector has fallen back on seeking protection via targeted countervailing duties such as those pending on common aluminium alloy sheet.


DOUBLE OR QUITS?

Eighteen countries are going to be hit with penal alloy sheet duties, a good example of the tariff displacement effect.

Earlier rounds of U.S. duties were aimed at China, the world's largest producer of both primary aluminium and semi-manufactured products.

China remains a massive exporter of products and "increasingly, as Chinese exports displace domestic production in foreign markets, producers in those countries are exporting their own production to the United States," the Aluminum Association notes.

"Despite all his bluster, President Trump has failed to address the fundamental issue of excess capacity in China's aluminum market," according to Representative DelBene.

China's dominance of the world's aluminium market is likely to grow even greater as higher-cost smelters such as Alcoa's Ferndale facility are forced out of operation. The last two big aluminium price troughs, in 2009 and in 2016, saw shifts in global capacity in China's favour.

China's role in the aluminium supply chain is well understood and industry bodies such as the Aluminum Association have long argued that catch-all tariffs are not the answer to chronic overcapacity.

The Organization for Economic Cooperation and Development (OECD) has found that while government support is common in the aluminium industry, "it is especially large in China". ("Measuring distortions in international markets: the aluminium value chain", OECD Trade Policy Papers, No. 218, 2019)

The stage should be set for the rest of the world to start a serious dialogue with China about its impact on the aluminium sector.

Alas, the Trump administration has in the past shown no inclination for that sort of multi-party trade negotiation.

Tariffs are the instinctive Trump response to market tensions. Faced with the new crisis looming in the domestic aluminium sector, the current administration is more likely to double down on existing policy and lift tariff rates.

But it still won't have any lasting effect on the rising tide of Chinese aluminium.

(Editing by David Clarke)