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Aluminium International Today September/October 2019

The news that China has – once again – produced record amounts of primary aluminium in June followed by continuously rising Chinese exports in July, surprises no one in the industry. But it will once more up the pressure on European companies in the downstream sector, as China dumps its aluminium products onto the market. The subsequent slump in prices has already devastated entire industries in Europe, particularly in the UK and the Netherlands. It is therefore clear that the downstream industry is facing an existential threat that requires a comprehensive policy adjustment, as the Federation of Aluminium Consumers in Europe (FACE) has argued for years.

The EU is betting on the wrong horseDecades ago, when the EU created an import tariff structure on unwrought aluminium and alloys of 6 percent, it was done to protect the domestic primary aluminium producers. Now, years later, it has become abundantly clear that the tariffs have done nothing to protect the upstream. In fact, EU smelters have been closing down at rapid clip due to high

input and electricity costs, among other factors. Since 2004, 900,000 tonnes of primary production have been shuttered, while consumption of raw aluminium has grown by 1,300,000 tonnes.

Smelter closures have been accelerated by the decisions of major producers in the EU to delocalize production, taking advantage of free trade agreements with countries such as Iceland and Mozambique. Coupled with growing demand, the closing down of EU smelters has accelerated the continent’s dependency on imports, which now stands at 74%. To still maintain import tariffs in an import-dependent market is nothing short of ludicrous.

Import tariffs are killing downstream SMEsIf the tariffs failed to do what they were supposedly conceived for – protect EU smelters – they have also developed into a threat to the EU’s downstream sector and the thousands of small and medium-sized enterprises (SMEs) active in it across the bloc. These enterprises are the backbone of the European economy. It is easy to see

why: in 2015, 23.4 million SMEs operated in the European Union's non-financial business economy, employing 91 million people and generating €3,934 billion.

In the aluminium sector, the downstream segments account for about 70 percent of the annual turnover of industry and for nearly 92 percent of employment. In order to hammer home the urgency of the situation to decision-makers in Brussels, FACE commissioned to the LUISS University in Rome to conduct a study to analyse the position of non-integrated downstream producers and provide an assessment of the future.

“Hidden subsidy” mechanismLaunched during an event organised by Politico in Brussels this past June, the LUISS study should be a wake-up call to the EU. The application of the 6 percent tariff has a devastating effect on the downstream’s competitiveness. The tariff has incurred extra costs of up to €18 billion on SMEs between 2000 and 2017, or around €1 billion per year. A low-margin industry, the downstream’s production costs are greatly influenced by raw material prices,

Import tariffs applied on unwrought aluminium in the EU in 2019

HS code

76.01.100000 R0705010

R1623900

R1623900

R9720860

76.01.202101

76.01.202090

76.01.208000

EU regulation No.

Tariffs(2019)

0%

3%

4%

6%

Code description

Aluminium, not alloyed,Aluminium content >99%

Aluminium alloys, slabs and billets, containing lithium, Aluminium content<99%

Aluminium alloys, slabs and billets Aluminium content<99%

Aluminium alloys, (other)Aluminium content<99%

The EU is 74% dependent on primary aluminium imports.EU primary aluminium consumption, 200-2016 (kt).

Source: European Aluminium, CRU Group, GDA

Primary production

10000

9000

8000

7000

6000

5000

4000

3000

2000

0

2000 2002 2004 2006 2008 2010 2012 2014 2016

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1000

Primary imports Primary aluminium imports dependency rate

Focusing on the downstream will save European SMEs By Mario Conserva, FACE Secretary General

–

Aluminium International Today September/October 2019

EUROPE www.aluminiumtoday.com

which can account for up to 60 percent of production costs.

The aluminium price is determined by the LME, which sets the daily base metal prices. Whether aluminium is imported from duty-free sources or produced in the EU, the duty is included into the price, thereby artificially increasing these raw material cost. As the study shows, “…. there is no incentive for domestic unwrought aluminium producers to not align their prices to the highest possible level – that is, the duty-paid price.” Downstream SMEs’ already tight margins are being squeezed even more as “….EU market prices for unwrought aluminium always include the customs duty.”

It’s no wonder then that domestic downstream producers have not been able to develop and cover demand, which has led imports of semi-finished products to grow by 44% since 2010.

We estimate that the duty has lowered the share of domestic sales by 4%, which translates to lost revenues of €2 billion a year and €200 million in profits.

This is the essence of the “hidden

subsidy mechanism”: while downstream SMEs have seen their competitiveness stripped from them, the duty has acted as a conveyor belt, transferring financial resources to smelter operators. In exchange, upstream producers should have used this money to invest and compensate for cost differences between them and non-EU smelters, as well as boost research and development. That jobs continued to be cut, and investments continued to be further curtailed, shows that this was not the case.

The way forward: Abolish the tariff, save Europe’s industrial baseFrom the study’s results it is clear that this situation needs to be urgently rectified in favour of the downstream. FACE has long urged the EU to scrap the import tariffs altogether. With its absence of raw materials, limited alumina production and strongly declining production of primary aluminium, the EU aluminium industrial value chain seriously depends on foreign import metal imports. The import duty only serves to add extra costs to the firms

in the value chain, resulting in reduced competitiveness on the global market.

A new policy is needed, one in which the import tariffs are abolished, which will lead to the reduction of raw aluminium prices along with an increased variety of supply sources. Promoting the global competitiveness of the sector must be a top-priority. The downstream sector’s main advantage over non-EU competitors is its remarkable ability to innovate as well as its technical know-how. Any new EU policy needs to take into account various incentives geared towards SMEs with the objective to defend and further expand the sector’s technological leadership.

If the EU wants to prevent the entire aluminium industry from shutting down in the future under pressure from China and low-cost producers, it is high time to implement a new way forward with promoting the activities and operations of downstream SMEs at its core. Otherwise, the cost of inaction will be measured in the on-going bankruptcy of EU SMEs, rising unemployment numbers and declining wealth across the continent. �

€4.5bln

€5.8bln

Biggest share of the extra cost is cashed in by EU primary and secondary producers

The structure of the extra cost paid by the downstream sector. Source: LUISS, FACE

€4.6bln

€2.7bln

Duty revenue 16%

Extra revenue for primary producers with duty free access to EU...

Extra revenue for EU primary producers 26%

Extra revenue for EU secondary producers...

Aluminium ingot P1020, in-warehouse Rotterdam, S/tonne

Data is averaged for 5-year periods

Average extra cost for dutiable aluminium imports. Based on 2018 figures. Source: LUISS, FACE

02000-2004 2005-2009 2010-2014 2015-2019

50

100

150

200

250

300

$68

$55

$68

$60

Duty unpaid premium Spread