Monday, 19 March 2018

U.S. aluminum surge relies on Canada

The U.S. auto industry’s steady flow of aluminum — a critical ingredient in the shift to lighter and electrified vehicles — may hinge on whether the temporary tariff reprieve granted to Canada becomes permanent.

President Donald Trump last week imposed penalties of 10 percent on imported aluminum and 25 percent on imported steel, but with two notable exceptions — Canada and Mexico, which are wrangling with the U.S. over the future of the North American Free Trade Agreement.

It was a lucky break for the auto industry.

North America’s automotive supply chain relies heavily on raw aluminum from smelters in Canada, where cheap, abundant hydropower has made it a favored location to produce the energy-hungry metal. And in reaction to Trump’s tariffs, the industry gasped collectively, and then exhaled at the exemption — at least temporarily — of Canada.

Steel makers, including U.S. Steel and AK Steel, were supportive of the president’s move. U.S. Steel responded to the promise of tariff protection by saying it will reopen its steel mill in Granite City, Ill., which has been closed for two years.

Canadian allies

The aluminum industry was more alarmed — even after the White House temporarily exempted Canada, which Trump made clear would be contingent on how that nation negotiates the free-trade pact with the U.S.



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Marco Palmieri, president of aluminum supplier Novelis North America, indicated that Chinese producers — not Canada — are the source of U.S. trade challenges.

“We firmly believe that Canada … can be a significant ally along with others to correct the Chinese overcapacity issue,” Palmieri said. “To preserve the health of the U.S. aluminum industry, the administration must exempt Canada from tariffs.”

Even before the tariffs, aluminum suppliers were stepping up investments in U.S. plants to meet rising demand from the auto industry. But many of those operations rely on raw aluminum from Canada’s smelters.

Matt Meenan, senior director of public affairs at the Aluminum Association, said aluminum from Canada is needed because U.S. smelters can’t expand fast enough.

“Smelters are hugely expensive, and it takes a long time to build them,” Meenan said. “Even if we have all of our U.S. capacity running, it wouldn’t be nearly enough to supply demand.”

In 2028, the average North American vehicle will contain 565 pounds of aluminum, according to Ducker Worldwide, a suburban Detroit consulting firm. That’s up from 397 pounds in 2015, the latest figure available.

Big investments

Novelis and Arconic, North America’s two biggest aluminum suppliers, have invested heavily to expand U.S. production of automotive sheet aluminum. Novelis spent $400 million to improve its plant in Oswego, N.Y., while Arconic spent $300 million to expand its plant in Davenport, Iowa.

A younger player, Braidy Industries, soon will launch construction of a $1.4 billion aluminum rolling mill in Kentucky. Logan Aluminum, a joint venture between Novelis and the Japanese-owned Tri-Arrows Aluminum Inc. that supplies the canned beverage industry, late last year entered the automotive supply chain with the opening of a $248 million automotive sheet plant in Russellville, Ky.

Raw source

Aluminum sources

The top 5 aluminum exporters to the U.S. and the value of those exports in 2016, the most recent year available
Canada $5.6 billion
Russia $1.3 billion
China $1.3 billion
United Arab Emirates $1.0 billion
Bahrain $0.4 billion
Source: U.S. Census Bureau

But it’s a different story for raw aluminum production. Only five aluminum smelters operate in the U.S. today, down from 18 in 2007, according to the Aluminum Association.

The largest U.S. producer of raw aluminum, Century Aluminum, endorsed the tariff. On the day Trump imposed the measures, the Chicago company announced plans to spend $100 million to restart idled production at its smelter in Hawesville, Ky., which operates at 40 percent of capacity.

Century has two other smelters, in Mount Holly, S.C., and Robards, Ky., accounting for much of the nation’s remaining smelter capacity.

Last week, Magnitude 7 Metals, a Swiss company, said it would restart a smelter in New Madrid, Mo., that it acquired out of bankruptcy.

But it will take more than that to put a dent in the auto industry’s rising demand for aluminum.

A hot market

Braidy Industries’ decision to spend big to become an automotive supplier is indicative of the enthusiasm for the market.

Bouchard: Tariffs should favor close U.S. allies.

Braidy, of Ashland, Ky., is a relatively small player compared with its competitors. But Braidy CEO Craig Bouchard noted that his venture has attracted direct investment from Kentucky. He is now on a first-name basis with Kentucky’s Republican senior senator, Majority Leader Mitch McConnell, having spent the last three months lobbying McConnell and other lawmakers in Washington to avoid tariffs.

Bouchard said his top supplier of raw aluminum will be a foreign company. But with the launch of production scheduled for 2022, a lot can happen between now and then.

He supports Trump’s effort to spur U.S. aluminum production, he told Automotive News after last week’s announcement. But he added that the tariffs should be structured to favor close U.S. allies.

“I would single out strong allies of the U.S. for special treatment,” Bouchard said. “I would give them exceptions.”

Rising prices

Braidy would have to absorb any added cost of imported metal. Even without the tariffs, aluminum prices have been drifting up.

As of February, aluminum ingots were priced at $2,154 per metric ton, up from $1,920 a year earlier, according to New York consulting firm AlixPartners.

Last week, Commerce Secretary Wilbur Ross estimated that the tariffs would drive up steel costs by about $175 per vehicle, but he did not offer an estimate of aluminum prices.

Kristin Dziczek, director of the industry, labor and economics group at the Center for Automotive Research, reflected the sentiment of many in the industry when she recommended the creation of a coherent industrial policy for aluminum, with the U.S., Canada and Mexico treated as one big market.

“If you look at trade between Canada, Mexico and the U.S., it is very integrated,” Dziczek said. “It is all one network.”

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