The Canadian aluminium industry is in for a tough year as demand for the metal is forecast to slump.
What’s worse, Aluminium Association of Canada president and CEO Jean Simard says the association has no idea how long the slump will last.
Speaking at a function hosted by the Kitimat Chamber of Commerce on Friday, January 17, Simard said the global overproduction of the metal coupled with a general economic slowdown around the world, and the likelihood of recessions, would further impact the export of Canadian aluminium.
“We are at the end of a very long, probably the longest manufacturing cycle in our history. We had ten years of constant growth and demand in our economy,” said Simard. “There is still growth in demand but it’s not at the same pace as it has been in the past ten years.”
He said the ‘elephant in the room’ was the rampant production of aluminium by China.
“They produce 57 per cent of all the aluminium produced in the world. In the past 20 years China has produced 260 million tons of aluminium, whereas North America over the last 100 years has only produced 240 million tons.”
He said to put Chinese production into context, the country currently produces ten times more than India, the world’s second-largest producer of aluminium.
“They produce faster and keep adding capacity. It’s an unruly market not dictated by normal market behaviour.”
Simard added that the situation was worsened by state-sponsored production, larger players and the increased shipping of finished and semi-finished products onto the world market, factors which are eroding Canada’s market share of especially the American market.
“China oversubsidizes aluminium production in that country by three to eight times. One company alone benefitted from $35 billion in state subsidies,” said Simard.
He said stricter import legislation to protect local aluminium production by the world’s top-producing governments wasn’t as effective as would be expected.
“Semi-finished products enter the world in a very uncompetitive fashion,” said Simard.
He cited the example of the U.S. government which introduced anti-dumping legislation to protect the U.S. aluminium production industry.
The legislation, introduced in March 2019, slapped a 350 per cent increase in the tariff on imported aluminium wheels to that country to prevent the dumping of Chinese products into the U.S. market.
“At the same time, Mexico saw a 260 per cent increase in the import of those wheels from May to August. There was also an increase in the import of aluminium wheels from Mexico to the U.S.,” said Simard.
He said aluminium is like water, finding the path of least resistance into markets despite tariffs.
This is further compounded by Mexico being a preferred point of entry for aluminium into the North American market.
Mexican vehicle manufacturers are being supplied by producers who discount the cost of their metal to get access to the U.S. market.
“Even though there is a trade agreement with the U.S. that benefits Canada, it doesn’t protect the North American aluminium industry from such situations.”
He said the global price of aluminium in 2020 is expected to hover around between US $1,600 to $1,700 per ton.
“This is not good news and it means another tough year for Canadian aluminium producers.”
He said the good news is that the U.S. still needs, and will always need, to import aluminium.
“Today it’s the prime market in the world. The Americans have done it to themselves – they are creating the highest price for aluminium in all world markets. Unfortunately, it’s destroying a lot of mom-and-pop shops who were processing aluminium for products in the U.S.
“They are gradually being priced out the market because the metal is too expensive. They’re being replaced by suppliers from Mexico who access the metal at a discounted price, process it and ship it to the U.S.”
He said while Canada struggles to compete in an unequal market, the U.S. market is still very attractive.
The good news for Canadian manufacturers of aluminium products is that from September this year they will be able to access information about the origin of the metal they are importing.
“This means documenting the metal from the smelter to the border, and from the border to the customer,” added Simard.
Canada currently monitors shipments of aluminium into the country – importers have to indicate the origin of the aluminium they are bringing into the country, to prevent transshipment.
University of North Carolina economics professor Patrick Conway defines transshipment as “the practice of moving cargo from one country to another by way of a third nation to evade trade restrictions.”
In theory, the importing of Chinese aluminium products into Mexico, for later export to the U.S. without significantly altering the original product, could be considered transshipment.
“Deceptive transshipments violate international law, but are costly and hard to stamp out. I believe efforts to do so will also discourage imports that are valuable to U.S. consumers,” says Conway in an article published in 2018.