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US aluminium tariffs; collateral damage and a missed target

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It is China's dominance of the aluminium supply chain that lies at the heart of the industry's problems, both in the US and everywhere else.

SO the trade wars begin. As of last Friday the United States has imposed tariffs on imports of steel and aluminium from Canada, Mexico and the European Union (EU).

Canada and Mexico have already responded in kind. The EU won't be far behind.

Steel and aluminium are but pawns in a bigger trade game, the unique characteristics of each supply chain forgotten as the US administration ratchets up the negotiating pressure on its Nafta partners and adds cars to its list of grievances with the EU.

The loss of focus is a shame because aluminium in particular shows why tariffs are such a poor trade weapon, managing both to cause maximum collateral damage and miss the prime target. Which is China.

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It is China's dominance of the aluminium supply chain that lies at the heart of the industry's problems, both in the US and everywhere else. The country produces more than half of the world's aluminium and has been exporting massive quantities for many years.

The Trump administration's trade salvoes won't change that reality. But they have galvanised a coalition of national industry bodies, including the US' own Aluminum Association (AA), to try and push China rather than tariffs onto the aluminium agenda at this week's G-7 summit in Canada.

By levying a 10 per cent import on Canadian aluminium, the US has just hit its largest single supplier. Canada shipped 2.5 million tonnes of primary metal to its neighbour last year, just over half of all imports.

It's not only supposed to be a friend and ally but, to quote from the Section 232 report which laid the ground for these tariffs, Canadian aluminium supply is part of the two countries' "integrated" industrial defence base.

Only two of last year's top 10 suppliers to the US are permanently exempt from tariffs: Argentina, which shipped 250,000 tonnes, and Australia, which shipped 100,000 tonnes. Which means that the price of aluminium is now significantly higher in the US than anywhere else. The CME spot contract tracking the US Midwest physical aluminium premium is currently sitting at 21.25 cents per pound (US$468 per tonne).

There is a Russian premium in that premium, reflecting the sanctions gun aimed at Rusal, the second-largest supplier of primary aluminium to the US last year. But the Russian disruption is also being priced into higher premiums everywhere else and Japanese buyers are still being offered aluminium at a premium of just US$160 per tonne for the next quarter.

US aluminium consumers, it seems, will pay the price for the administration's stated aim of forcing US smelter restarts. However, with only around one million tonnes of dormant capacity, domestic production is never going to plug the five-million tonne import gap, even if all can be restarted. The US is going to remain a big importer of aluminium for the foreseeable future.

Which means that tariffs, to quote Heidi Brock, president and CEO of AA, will do "little to address the China challenge while potentially alienating allies and disrupting supply chains that more than 97 per cent of US aluminium industry jobs rely upon." It is, she noted, "an unfortunate outcome".

Tariffs, meanwhile, will have only a limited impact on China. It doesn't export primary metal and its US-bound shipments of aluminium semi-manufactured products ("semis") have been falling in recent years in the face of multiple anti-dumping duties, most recently on aluminium foil.

China's "semis" export flows, running at an annualised 4.6 million tonnes in the first quarter, will simply be redirected, a prospect that is alarming the European Aluminium Association (EAA).

"This redirection could see an additional 35 per cent of semi-fabricated aluminium products entering Europe, which creates unfair competition for European producers and will be particularly challenging for SMEs," according to EAA director general Gerd Götz. He and everyone else in the industry is agreed that the US tariffs have missed their target.

So the US, European, Japanese and Canadian aluminium associations are all calling for multilateral talks with China.

"It is vital for the industry to initiate a top-level process addressing overcapacity through policy changes by multilateral international institutions such as G-7, G-20 and the OECD (Organisation for Economic Co-operation and Development)," according to the EAA. Starting with this week's G-7 summit, where the aluminium coalition is planning to present a "roadmap" to get things going.

There is a precedent for this in the steel market, where Chinese overcapacity also led to the creation of a multilateral task force under the auspices of the G-20. International pressure played its part in Beijing's subsequent reform of its leviathan steel sector, including the wholesale closure of both "illegal" and "zombie" capacity.

China's exports of steel products, which roiled the rest of the world just as much as its aluminium exports, fell by 31 per cent last year and were down another 26 per cent in the first three months of this year.

Could collective political pressure achieve something similar in aluminium?

The timing may be highly propitious for the type of "government-to-government negotiations" called for by the aluminium associations. Beijing is already embarked on a restructuring of its aluminium sector. As with steel, this has led to the closure of "illegal" capacity, meaning that not fully permitted, and tight restrictions on new capacity.

It is also showing signs of wanting to shift its power-intensive smelters away from "dirty" coal to "green" hydro power, a potentially massive undertaking given some 90 per cent of its aluminium production capacity is based on thermal power.

The AA's Ms Brock may well be right when she claims that "now is the time to negotiate a long-term, enforceable agreement with China that tackles this perennial problem once and for all". Jaw-jaw rather than war-war, to paraphrase Winston Churchill.

But will the Trump administration agree? REUTERS