Limits to growth

Aluminum has been a growth industry through most, if not all, of the post-World War II era, with production and consumption of the light metal increasing steadily and sometimes rapidly.

That is not to say that aluminum producers have been basking in profits and unfettered growth opportunities throughout that time. Although it is a growing basic material, it is still a commodity and a basic material subject to cyclical pricing and rounds of disinvestment.

Overall, however, the light metal has gained favor in its major applications, such as transportation and packaging, precisely because its light weight makes it ideal when energy saving is a priority.

In the current decade, demand has stayed strong. Problems in the market, according to analysts and executives at aluminum firms, have more to do with an oversupply of finished and semifinished aluminum flowing from China.

A popular refrain

Throughout much of this decade, metals producers in America—led by steelmakers and primary aluminum producers—have complained to policymakers that competitors in China are operating beyond that nation’s domestic capacity needs and shipping “subsidized” metal to the U.S.

Most recently, in mid-December 2016, a consortium of trade groups called the Manufacturers for Trade Enforcement (MTE) has been urging the federal government to stand firm against conferring market economy status to China, which is spelled out as a way forward for China as part of its World Trade Organization (WTO) membership.

MTE members include not only The Aluminum Association, the Aluminum Extruders Council and the American Iron and Steel Institute, but also the Institute of Scrap Recycling Industries (ISRI).

The group announced its formation in March 2016, saying its mission is “to oppose China’s designation as a market economy at the end of 2016.”

In its mid-December 2016 press release, MTE credits the outgoing Obama administration for its refusal to confer market economy status to China. “It is heartening to see that the U.S. government is sticking to its commitment to enforce our trade laws,” says Heidi Brock, president and CEO of The Aluminum Association and co-chair of MTE. “We’ve appreciated the hard work and principled stand of the current administration on this important issue and look forward to working with the incoming administration to ensure that American manufacturing firms can compete on a level playing field with foreign competitors.”

It appears the incoming Trump administration, still taking shape as of this writing, will include one or more people in top level trade posts with metals industry experience. News reports indicate Trump will nominate Wilbur Ross, chairman of the former ISG Steel (now part of Arcelor- Mittal), as his secretary of commerce.

Dan DiMicco, the former CEO of Charlotte, North Carolina-based Nucor Corp. and long an outspoken critic of perceived steel “dumping” by overseas companies, has been Trump’s transition liaison to the Office of the Trade Representative and may be offered a permanent position.

Secondary aluminum producers in North America, and the recyclers who supply them, are among those watching the trade situation closely. Although secondary aluminum production in the U.S. this decade has not necessarily declined, some analysts and executives say the industry has not reached its full potential because of aluminum products arriving from overseas.

Secondary considerations

At the ISRI Commodities Roundtable 2016, held in Chicago in September, the topic of excess aluminum capacity in China was a dominant and recurring one.

“Smelter restarts in China will continue to progress,” stated Mike Southwood, a senior consultant with the London-based research and consulting firm CRU Group. “As such, the (aluminum) market is awash in material. The pace of growth in capacity will slow, but will still rise by 3.9 million tons by 2020,” Southwood said.

In the secondary aluminum sector, the announced sale of Cleveland-based Aleris to a Chinese investment group led by the chairman of Chinese aluminum producer China Zhongwang Holdings preceded the roundtables by one month.

The parties involved say they expect the transaction to close by the first quarter of 2017, but activities China Zhongwang has been involved in have drawn scrutiny. Media reports indicate the firm has stored significant amounts of cast aluminum in Mexico to avoid high tariffs. That stockpile has remained in the news through mid-December 2016, when a Vietnamese reporter cooperating with The Wall Street Journal tracked it to a warehouse in Vietnam.

Another report has accused a Philadelphia area company, which allegedly has familial and business ties to China Zhongwang, of warehousing aluminum semis in its facility in that region. That allegation caused the U.S. Department of Commerce to open an investigation to determine whether the company has been repositioning and possibly mislabeling aluminum to avoid tariffs, according to the Wall Street Journal.

One year earlier, an investment group led by the chairman of one of China’s largest secondary aluminum producers, Taicang City-based Ye Chiu Group, bought Metalico Inc., a scrap processing firm with more than 20 locations in the U.S.

Metalico’s new ownership group, which goes by the name Total Merchant Inc., has not disclosed how or whether Ye Chiu’s Asian secondary aluminum production capacity will tie into its North American scrap processing operations other than to say it will “seek appropriate opportunities in the United States metals and commodities market.”

The investments by China-based companies ultimately may result in increased secondary production in North America, where a robust and healthy automotive sector this decade has helped output grow. Critics say, however, the output growth has not been occurring at the appropriate pace.

Past and present

Statistics maintained by the Reston, Virginia-based United States Geological Survey (USGS) indicate secondary aluminum production enjoyed a healthy rise in output in 2013, but overall this decade its output has not been marked by increases that match the auto industry’s hunger for aluminum alloys.

In 2011 and 2012, as the economy was clawing its way back from the late 2008-2009 financial crisis, 1.47 million and 1.44 million metric tons of secondary aluminum were produced, respectively.

The 2013 bump up brought secondary production to 1.63 million metric tons, and it rose again to 1.7 million metric tons in 2014. However, 2015 saw a reduction back down to 1.64 million metric tons of output.

On the import side, the low value of the Canadian dollar has caused that country to be the major source of imported primary aluminum. According to USGS, Canada was responsible for 65 percent of the overall aluminum products imported into the U.S. between 2011 and 2014.

More recently, in 2015 and the first nine months of 2016, China has played a larger role, according to the USGS, particularly in the semifabricated products sector. “China accounted for 31 percent of semifabricated product imports,” the USGS says of the nine-month period. Nonetheless, secondary aluminum production has increased by 6 percent in the first three quarters of 2016 compared with the same period in 2015.

As far as U.S. Census Bureau and USGS statistics show, in 2016 China has been exporting semifinished plates, sheet and bars at far greater levels than crude metals or alloys: 274,000 metric tons versus 243 tons, respectively.

That sector has clearly felt the influence of China’s overcapacity, the USGS says in its review of 2015 statistics: “Imports of semi manufactures from China increased by 57 percent in 2015 compared with those in 2014; China accounted for 54 percent of semi manufactures imported in 2015 compared with 29 percent in 2014,” according to the USGS.

For many secondary aluminum alloy producers in the United States, if extruders and other links in the aluminum manufacturing chain are using imported Chinese semis, these consumers are replacing sales opportunities for finished ingots.

In the primary sector, the effects are clear, The Aluminum Association says: “While Chinese primary aluminum production has continued to grow, U.S. producers are going out of business. Seven U.S.-based smelters have either closed or curtailed since 2015, meaning only two smelters remain fully operational in the U.S. today—the lowest level of production since World War II.”

As the automotive sector has increased its use of aluminum and sold record numbers of vehicles in the past few years, secondary aluminum producers do not currently face such a critical situation from the imports. To what extent U.S. secondary producers should be vigilant about their industry shrinking as rapidly as the primary sector likely will be a source of concern in 2017 and beyond.

The author is the editor of Recycling Today and can be contacted at btaylor@gie.net.