Canadian aluminum shows its mettle in face of Trump's tariff

Trade actions like the ones taken by the Trump administration this week are intended to inflict pain, and the steel and aluminum tariffs levied by the Trump administration are unwelcome developments for both industries in Canada.

But the harm will fall disproportionately on producers of steel, rather than aluminum — and not only because the tariff on steel (25 per cent) is higher than the one on aluminum (10 per cent).

The United States is in a much weaker position to hurt Canadian aluminum producers than it is to punish Canadian steelmakers. Indeed, the likely reason for the lower tariff on aluminum is that the Trump administration realizes it's American consumers, not Canadian producers, who will end up paying for it.

In fact, the top U.S. aluminum industry consultant says the tariff has, so far, actually enriched Canadian aluminum producers.

The U.S. is going to lose more jobs than it gains. No question about it.- Jorge Vasquez, Harbor Aluminum

That's because they responded to the announcement in March by factoring the tariff into their prices, and then essentially pocketed that 10 per cent surcharge during the two months that Canada enjoyed a tariff exemption.

Following Trump's announcement the base price of aluminum on the London Metals Exchange, which has been trending lazily downward, suddenly spiked from about 90 cents a pound to $1.20. It remains 15 per cent higher than it was, a bonanza for producers. It rose again on Thursday's news that allies' tariff exemptions would end.

"Trump wrote a cheque for $600 million to Canadian aluminum producers," said Jorge Vasquez of Harbor Aluminum in Austin, Tex., who has served as an adviser to both the U.S. International Trade Commission and the Canadian Trade Tribunal.

In effect, Trump's actions transferred more than half a billion dollars from the U.S. economy to Canada's since March.

Rivers of aluminum

The economic folly of the aluminum tariff doesn't stop there.

Key to understanding the counterproductive nature of this move, say industry watchers, is the inherent Canadian advantage bestowed by its abundant hydroelectric resources.

Aluminum is made from bauxite, a raw material Canada has very little of (almost half of the world's reserves are in Guinea or Australia).

The other main input is electricity. Canada — especially Quebec — produces a lot of cheap hydro. The mighty rivers of Quebec are the foundation of Canada's aluminum industry.

U.S. electricity rates are much higher. The price differential for this critical input far outweighs the cost of a 10 per cent tariff.

That's why U.S. industry buys half of its aluminum from Canada — nearly four times as much as it buys from its own producers.

The 14 U.S. aluminum smelters are typically older, smaller, and less cost-efficient than their counterparts in Canada, not to mention the ones in China and Russia. More than half of them are either closed or operating well below capacity.

Just one Canadian smelter — Aluminerie Alouette Inc. in Sept-Iles, Que. — comes close to equalling the entire output of the U.S. aluminum industry.

"This is not going to make the U.S. smelting industry more competitive. Not even artificially competitive," Vasquez told CBC News.

"The U.S. is going to lose more jobs than it gains. No question about it."

American smelters produced 740,000 tonnes of aluminum last year. Vasquez forecasts U.S. production of 840,000 tonnes this year, and close to a million the year after. But the U.S. imported 2,760,000 tonnes last year from Canada.

"The U.S. needs Canadian production," said Vasquez.

Big players are insulated

Jean Simard, president of the Aluminum Association of Canada, agrees.

"Tomorrow, they (U.S. buyers) still need that same metal. They're just going to pay more for it," he told CBC.

"The primary producers, the Alcoas, Rio Tintos and Alouettes who own the ten smelters that export about 90 per cent of their capacity to the U.S., are actively involved in totally integrated value chains in the automotive, aerospace and consumer goods industries in the US, so they will maintain their channels."

Simard said that the increase in metal prices will be passed on to American consumers through everything from cars to beer cans.

"This is like a spiral of inflation that's beginning, and it will be to the detriment of the whole U.S. economy."

Even if they ramped up production to maximum capacity, Vasquez said, U.S. smelters probably could only add about 2,000 jobs. He predicts the tariff will cause between 23,000 and 90,000 direct job losses in manufacturing.

And he said the threat of tariffs has contributed already to a sharp rise in the price of aluminum on the London Metals Exchange — meaning more profits for Canadian companies.

"The price the Canadian producers were getting last year prior to the duty is lower than the price they're getting today, even with the duties."

Scrap will 'cannibalize' any gains

But meagre as the gains appear to be for the U.S. job market, Vasquez said a secondary effect that will kick in as the market adjusts to higher prices will wipe even those jobs out.

Aluminum is one of the world's most recycled products. Scrap accounts for most aluminum production. Primary aluminum from smelters merely makes up the shortfalls.

Vasquez said that rising prices always prompt a great effort to recover scrap.

"We estimate that the 10 per cent duty alone will generate close to one million tons of additional scrap recovery, which will displace about 800,000 tonnes of primary aluminum."

"The bottom-line intention of this duty is the restart of all of the idle smelters in the U.S., but what this is going to do really is incentivize more generation of scrap, which is going to unwind over the next 24 months any smelter restart. Because the more scrap you generate, the more primary aluminum production you cannibalize or destroy."

As the demand for primary aluminum declines, the least-efficient producers will be the first to suffer. That means U.S. producers.

Eventually, Simard said, Canadian producers could end up sharing some of the cost of the tariff with their partners along the supply chain. But U.S. dependence on Canadian aluminum will not diminish, and rising aluminum prices seem likely to handsomely compensate Canadian smelters for any loss they incur down the road.

Vasquez said he believes the end-user — the American consumer — will continue to absorb the cost of the tariff.

Both he and Simard agree on one thing: this aluminum tariff is best understood as a new tax on U.S. manufacturers and consumers, rather than a killer blow to Canada's modern and efficient aluminum industry.