June 21, 2019 / 12:25 PM / a month ago

COLUMN-Europe's aluminium industry has its own tariff problems: Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters.)

* EU Primary Aluminium Production: tmsnrt.rs/2FreYe6

By Andy Home

LONDON, June 21 (Reuters) - U.S tariffs on imports of aluminium have changed the pricing landscape for domestic users.

The U.S. Midwest premium, which overlays the London Metal Exchange (LME) cash price, remains stubbornly high and consumers, led by the drinks can industry, are up in arms.

They could do worse than learn a tariffs lesson from the European Union, which has imposed its own duties on aluminium imports for many decades.

As with U.S. tariffs, the rationale is to preserve threatened primary aluminium smelters.

The duty, however, has ended up failing to stop multiple smelter closures while actively undermining the downstream sector, according to the Federation of Aluminium Consumers in Europe (FACE).

FACE, which has lobbied for many years against the duty, is renewing its efforts with a piece of research from the LUISS University of Rome, spelling out the negative impact on Europe's downstream aluminium value chain.

The report also has some interesting things to say about how tariffs really work.

LOST CAUSE?

The EU import duties currently range from 3% for unalloyed aluminium to 6% for alloys.

Countries with preferential trade agreements, such as Iceland, Norway and Mozambique, are exempt.

The explicit aim of the duty has always been the preservation of EU smelters, their workforces and their research and development.

The European Commission has twice reacted to consumer ire by reducing parts of the tariff structure, once in 2007 and again in 2013. The first time around there was even a proposal to eliminate the duties altogether but it wilted in the face of concerted opposition from producer countries.

Since then more EU smelters have shut, with plants closing in France, Germany, Italy, the Netherlands and Britain. The fate of two Spanish plants is now in the balance as U.S. producer Alcoa tries to negotiate a sale rather than close them.

Europe has lost more than 30% of its aluminium smelting capacity since 2008, the LUISS report notes.

Smelting, both primary and from scrap, now represents just 30% of turnover and 7% of jobs in the aluminium supply chain, according to FACE.

Net import dependency has grown steadily to 74% in 2017, when the region sucked in 6.2 million tonnes of aluminium.

PAID IN FULL

The duty has cost the EU downstream aluminium sector somewhere between 10 billion and 18 billion euros ($11 billion-$18 billion) since 2000, according to the LUISS study.

It's inevitably a broad range of estimates because it's a complex, fluid supply chain.

The real takeaway is that even though duty-exempt imports represented around 50% of total imports over the 2008-2017 period, everyone ends up paying the full 6% tariff anyway.

EU producers are incentivised to "align their prices to the highest possible level - that is, the duty-paid price."

Tax-exempt producers have a similar incentive, since they know the EU will still import tax-payable metal.

The end result is that "EU market prices for unwrought aluminium always include the customs duty", according to the LUISS study.

"There is no duty-free priced unwrought aluminium available to EU users and consumers," adds Roger Bertozzi, head of EU and Multilateral Affairs at FACE.

PAYING THE PRICE

Aluminium represents over half of production costs for transformers such as rolling mills and extruders.

Europe's downstream sector comprises more than a thousand companies, many of them small and medium sized operators without the negotiating clout to pass the duty on to their customers.

Competition is fierce. Europe has been just as much affected by China's high-volume exports of semi-manufactured products as the United States in recent years.

Compressed margins have taken their toll.

EU production of aluminium extrusions in 2017 was below levels in 2000, according to the LUISS study.

Flat rolled products output has increased but "at a significantly slower pace than on the global level."

"The EU's trade balance has constantly worsened in all sectors of aluminium semi-finished products, as consumption of semi-finished aluminium products has increased at a compound growth annual rate of 3% in the same period," the study adds.

Which is why other major net importers such as Japan, which exited the aluminium smelting business in the last century, don't have any import duties on primary metal and alloys.

HIDDEN SUBSIDY

The EU duty is, in the words of FACE, "a de facto hidden subsidy mechanism".

But it is not so "hidden" because the aim of the duty was always to support the dwindling number of European smelters.

It is looking ever more anomalous as the regional aluminium supply chain continues migrating from upstream smelting to downstream metals formation.

The net effect on the whole chain is negative, an outcome which seems at odds with the EU's renewed focus on strengthening its industrial self-sufficiency.

In essence, the European Commission has to decide whether the sector's future is one of smelting aluminium or making value-added products.

The United States may end up facing the same choice. Its 10% tariffs on imports of aluminium are also explicitly linked to protecting domestic smelting capacity.

Some production has been rekindled but with so many smelters dismantled years ago, there's only so much capacity to restart.

The United States, like Europe, is going to remain dependent on imports, both from tariff-exempt suppliers, such as Canada and Australia, and on non-exempt producers, such as Russia.

The lesson from Europe's import duty history is that first-stage consumers will end up paying the full tariff because there is simply no incentive for producers, domestic or tax-free, not to align their pricing to the highest possible level.

The fact that the United States must reach geographically further for its metal from Russian and Middle Eastern producers implies an additional lock on higher local prices.

Those hoping that the Midwest Aluminium premium is going to "normalise" any time soon may find themselves disappointed.

As EU consumers can attest, once duties are imposed, they can embed themselves into market pricing in complex ways, effectively raising the price for everyone.

($1 = 0.8852 euros)

Editing by Edmund Blair

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