Can Europe’s downstream #AluminiumFirms be saved?

| July 24, 2018


Overstating the turmoil the global aluminium trade finds itself in at present is a difficult task. Within weeks of his inauguration, United States President Donald Trump initiated an investigation of the national security implications of steel and aluminium imports under the auspices of a rarely used section of the Trade Expansion Act of 1962 – ostensibly as a way of targeting China. Just over 10 months later the administration used the findings of the Section 232 investigation to impose across-the-board tariffs of 10% on imported aluminium and 25% on steel. While the EU was initially spared the levy, the Trump administration allowed the exemption to expire on 1 June,
writes Colin Stevens.

While markets recoiled after the tariffs, the real blow came on 6 April, when the Trump administration took it a step further and slapped sanctions on aluminium magnate Oleg Deripaska and his aluminium firm U.C. Rusal. These measures were by no means business as usual: it was the first time that an export reliant, publicly listed company was blacklisted by the Treasury, sparking fears that other such companies could soon follow. As a result, aluminium prices spiked by 15% overnight, reaching multi-year highs by month’s end. European companies were especially vulnerable: Russian metal supplies a quarter of their aluminium supplies, and consumers were sent scrambling to find other suppliers – a mean feat in a market that was already experiencing shortages due to booming demand.

At one point Europe’s biggest aluminium plant, the Dunkirk smelter in France, announced gloomily that it only had enough raw material to operate for a few weeks, after US sanctions had cut it off from its main supplier: a Rusal-owned plant in Ireland. As one researcher put it, “you can’t yank the biggest supplier out of the supply chain and think it’s going to be OK”.

Though US regulators have, after seeing the turmoil the sanctions wrought, relented by pushing back the general license extended to third-party firms engaged with Rusal to October 23, the global aluminium trade continues to rest on tenterhooks as it waits to see exactly what end game the Trump administration has in mind.

Enter China

However, in the midst of this storm, one winner seemed to emerge: taking advantage of aluminium shortages and higher prices, China’s exports of the metal hit three year highs in June and the second highest level ever registered in July. These elevated levels come with drastic consequences for Europe’s SMEs , which can’t compete with Chinese products that are more often than not sold at below market rates or whose production process doesn’t respect environmental regulations. In other words, the supposed target of US-imposed tariffs managed not just to avoid pain, but to actually reap higher rewards as well, while the EU’s aluminium supply chain received a body blow.

These effects have set off a chain reaction on European soil as well. As a first step, the European Commission decided to limit the influx of steel imports and initiated a safeguard investigation to that respect. On 19 July, the Commission announced provisional safeguard measures to counter fears that steel products that were destined for U.S. customers would instead be redirected to Europe. The provisional measures concern 23 steel product categories and will take the form of a Tariff Rate Quota (TRQ). A tariff of 25% will only be imposed once imports exceed the average of imports over the last three years. As for aluminium, on 26 April the European Commission introduced prior surveillance of imports of certain aluminium products originating in certain third countries. The surveillance mechanism could yield similar safeguard measures for aluminium products.

However, as EU Reporter has learned in its conversations with several European small and medium sized aluminium producers, putting up tariff barriers to aluminium imports is bound to backfire and further contribute to the pain felt by these companies. Since the EU is heavily dependent on imports of the metal to satisfy demand, slapping further tariffs will only lead to higher prices and further shortages of metal. For example, Russia supplies around a quarter of Europe’s imports of aluminium slab, a type of metal that is tailored to client’s specifications and cannot be replaced in the short-term.

And the economic impact is by no means negligible. Some 250,000 jobs are directly created by the European aluminium industry, most of which are in the downstream sector, which produces the metal that goes into cars, trains, planes or into common household items such as food packaging or beverage cans. Any disruption to these companies will therefore have knock on effects on other industries and could lead to higher prices for consumers.

Downstream disruptions

Among the legions of downstream aluminium firms that have been labouring to make ends meet is Metrad SA, a Greek aluminium trader that supplies many of Europe’s SMEs. Though the way forward remains in doubt, a Metrad representative told EU Reporter that it has managed to navigate the dire straits thus far. Since one of its major supplies of metal was Rusal, the company had to adapt – and accept higher costs of at least 20%.

“We managed to find a way to purchase from other sources. I cannot give you numbers, but it has affected us when you have to buy new metal at the going prices above what you had booked in the past,” the spokesperson continued. “It’s not easy, because most [suppliers] have booked their contract for the year, and we’re trying to find bits in the interim here and there, just to fill up the gap.”

Though only participating in the market as a trader, Metrad’s representative said much of his aluminium business hinged on the machinations between the Trump administration, Deripaska, and Rusal. “At the moment we’re all fighting it and trying to find other sources, and we’re waiting for results in October, how Trump will proceed, what will happen, how Rusal will react to it.”

While aluminium traders have been forced to batten down the hatches, aluminium extruders have been forced to take even greater measures to avoid foundering in the storm. Few better examples exist than Bulgarian aluminium extruder Alcomet AD. Over 90% of Alcomet’s total output is sent overseas, and Sales Direcotr Nelly Toncheva told EU Reporter that the supply disruptions caused by the Trump administration’s tariffs and sanctions have forced it to make significant changes to the manner in which it conducts day-to-day business.

“Rusal is one of the main manufacturer suppliers of aluminium in European region and the most easily accessed one,” explained Toncheva. “Its strategic position gives [it] an advantage and we may deliver the necessary quantities in 5-7 days”. By comparison, other sources “would take 20-30 days. This sudden decision forced us to reorganize purchasing of aluminium.”

In addition to major modifications to feedstock supplies, the tumultuous aluminium market has disrupted significant long-term plans the firm set in motion years ago. “A decision was made in 2016 to considerably extend the production capacity to accommodate new orders and to expand to new markets outside Europe,” said Toncheva. “Alcomet’s investment in expanding its capacity and increasing production efficiency will include purchasing state-of-the-art technology. Up to now we avoided these negative events and kept the deadlines and continue implementing the investment program.”

Metrad and Alcomet are but two of Europe’s main small and medium-sized enterprises that provide the bulk of jobs in the aluminium sector.

Thus far the Trump administration has shown itself receptive to the damage its sanctions on Rusal has done, but will it learn the lessons of unintended consequences soon enough to save the scores of downstream aluminium firms that find themselves barely hanging on?

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Category: A Frontpage, EU, US