China’s slowdown and contraction in US manufacturing present problems on multiple fronts.
Assessing the current state of the United States aluminum industry raises the key question, “Compared to what?”
Aluminum has made a strong comeback since the days of the Great Recession. Like many industries, particularly in manufacturing, aluminum saw a significant drop in demand in 2008 and 2009, but the picture has improved markedly since then. U.S. manufacturers, most notably in the automotive sector, have been incorporating more aluminum in their products for a variety of reasons, including shaving weight off vehicles to make them more fuel efficient, thereby increasing demand for the metal.
Most recently, however, the economic data suggest a slowdown in manufacturing, not only in China, but in the U.S. as well. This could prove worrisome for an industry with a surplus of capacity and supply; indeed, allegations of dumping by certain parties have been heard.
This leads to the question of international trade and its perennial bogeyman, China. The Aluminum Association, a trade group based in Washington, D.C., says China isn’t playing by the rules, and it is rallying its members and lobbying policymakers around its program of what it calls common-sense measures to rein in Chinese excesses.
“Aluminum ended 2015 at above $1,500 per ton, but got off to a rough start in 2016,” said Yang Cao, an aluminum research analyst. “The macroeconomic news has hit the market hard. First there was a decline in Chinese manufacturing data, then the services sector index. Next came drops in U.S. manufacturing data.”
Despite data showing that the U.S. economy grew for the 79th consecutive month as of December 2015, the U.S. manufacturing sector contracted toward the end of last year, according to the latest Manufacturing ISM Report On Business. Of 18 manufacturing industries evaluated, six reported growth in December, while 10 industries, including transportation equipment, contracted. The December purchasing managers’ index registered 48.2 percent; a reading that indicates the sector is contracting.
Heidi Brock, CEO of the Aluminum Association, acknowledges the challenges the industry faces but maintains that “much of the aluminum industry story today is quite encouraging.”
Aluminum saw a significant drop off in demand following the Great Recession but since then has seen steady growth. “Today, our demand profile is back on the rise in a big way,” she said.
Last year, aluminum producers shipped 25.5 billion pounds of metal in the U.S. and Canada for the first time since the mid-2000s. “That represents more than 35 percent growth in shipment volumes compared to the trough of the recession in 2009,” said Brock. “Demand today is approaching the record levels we haven’t seen since the mid-2000s.”
Much of the growth is attributable to the increasing use of aluminum in the automotive and transportation sector. The use of aluminum in transportation has nearly doubled since 2009. A research study indicates that use of aluminum in the average North American vehicle will grow from less than 400 pounds to more than 500 pounds in 2025.
Many of the problems the industry faces are laid at the feet of China by Brock. “Years of state-supported growth and the slowing Chinese economy have led to a global oversupply of Chinese-produced aluminum,” she said.
While China’s economy was booming, it absorbed millions of tons of metal and a significant number of Chinese smelters came online to meet the demand. China’s smelters now produce around half of the world’s aluminum supply compared to 11 percent in 2000. Meanwhile, the number of aluminum smelters in the United States declined from 14 in 2005 to eight now. Between 2012 and 2014, imports of Chinese semi-fabricated aluminum into the U.S. grew by 115 percent. In 2015 imports were up by 63 percent.
“There is mounting evidence that certain players in the Chinese aluminum industry are misusing and even circumventing trade rules, further distorting the market,” said Brock. “These firms are shipping aluminum into the U.S. or through third-party countries in the form of partially semi-fabricated products. These products differ from genuine semi-fabricated products as they are then re-melted for use as primary aluminum.”
The companies in question engage in those practices to avoid the 15-percent Chinese export tax on primary aluminum, according to Brock, and also receive a 13-percent value-added tax rebate on the metal and avoid U.S. anti-dumping duty margins on imports of primary aluminum into the U.S.
“Actions like these violate international trade rules,” said Brock, “they create an un-level playing field for U.S. aluminum producers, and they lead to distortions in the global marketplace that have ripple effects across the entire industry. This behavior deserves greater transparency as it is highly disruptive to the reputation of the entire aluminum industry and its global market.”
To address these issues the Aluminum Association is calling for a series of “common-sense measures” on the part of the U.S. and Chinese governments to ensure a level playing field where all global aluminum producers can compete fairly. “These actions can drive positive outcomes for both countries,” said Brock.
The measures include improve data transparency: “All global players, including the Chinese government, should accurately track and disclose aluminum trade data in a timely manner,” said Brock.
The Aluminum Association also advocates cracking down on misclassification. “Some players are engaging in deliberate metal misclassification to avoid relevant trade duties, unconstrained by government enforcement,” said Brock. “This hurts North American producers and violates Chinese law. The U.S. Trade Representative and the U.S. International Trade Commission should start an investigation into these matters.”
A petition filed by the Aluminum Extruders Council, a U.S. trade group, against China Zhongwang Holdings Ltd. before the U.S. International Trade Commission late last year addresses some of these issues.
Brock also wants China to maintain long-standing export duties. “The current situation in the Chinese market means that certain export duties are appropriate and should remain in place while underlying issues are addressed,” she said.
“We remain committed as an association and industry to working toward a level playing field in the global aluminum market,” Brock added. “Working together, China and the United States can achieve this mutually beneficial objective.”