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WEDNESDAY, AUGUST 22, 2018
Click HERE for Monday;s quote from Senator Jack Reed (D-RI).
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ROLLING OUT THE ALUMINUM ISSUE
"I assume that the national security worry would be that we're not producing enough basic aluminum ingot and that, if we don't produce any of it, that's a national security problem. Would that be right?"
Senator Lamar Alexander
Republican from Tennessee
July 26, 2018
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This is the 7th and last of our recollections from the July 26 hearing by the Senate Subcommittee on Commerce, Justice, Science and Related Agencies, a subcommittee of Senate Appropriations. At least for now. The senators who participated covered a wealth of material, and we only skimmed the surface. So at some point we may come back to it.
As noted in earlier submissions, the U.S. Trade Representative, Ambassador Robert Lighthizer, was the only witness. Today's featured quote came from the second round of questioning and near the end of the hearing. Senator Alexander's question - "Would that be right?" - was very much a rhetorical one, which the Senator answered himself. Indeed, his comments amounted to a short essay on aluminum production in America today and the role of aluminum in the American economy. You will find the heart of his thesis and concerns in the extended quote below. This is, in effect, a composite of different questions that Senator Alexander put to Ambassador Lighthizer.
First, however, we would note two short but critical comments that Ambassador Lighthizer made in the exchange. Asked, "What's the goal of putting a tariff tax on aluminum?" Ambassador Lighthizer said:
I think the objective is to have a viable aluminum industry in the United States. [And he added] there [are] certain kinds of aluminum that you need in national defense.
Challenged with the assertion that the 10 percent tariff would not be enough to create an incentive for more ingot product, Ambassador Lighthizer said:
The calculation was made at the Department of Commerce that a 10 percent tariff on aluminum would make a difference so that you would end up with a sustainable industry in the United States.
From Ingots to Foil. To say the least, Senator Alexander was not convinced, and by the time that portion of their exchange took place, he had already set out the key elements of his concern. Here they are.
SEN. ALEXANDER:
I know a little about this because I grew up near Alcoa, Tennessee, and my father worked for an aluminum smelting plant. And you make aluminum by running a lot of electricity through bauxite, and then you make an ingot. And from that ingot you make pots and pans - well they roll it out. Then they make pots and pans and aluminum foil and all that kind of thing. I assume we're not putting a tariff on in order to create more aluminum foil plants or more pot-and-pan plants. I assume the national security worry would be that we're not producing enough of the basic aluminum ingot. And that if we don't produce any of it, that's a national security problem. Would that be right? ...
We have a pretty robust aluminum industry in the United States. We can make about anything: aluminum foil, special aluminum pots and pans.
There was a brief exchange about the number of aluminum smelters - ingot producing plants - there are in the United States. Senator Alexander said there are seven, noting that one of those is curtailed and so could be brought back on line, though he seemed to doubt that that would happen. In the same exchange, Senator Alexander said that American aluminum smelters employ roughly 4,000 people. He continued ...
SENATOR ALEXANDER:
Four thousand.
So we have 7.2 million people working in the automotive industry, whose jobs are affected. We just read in the morning paper [that] 11 percent of every car is aluminum and Ford and GM are saying they're going to not make as much money because of the tariff on aluminum. And it looks like we're doing that to protect 4,000 jobs in the aluminum smelting business. And we're not going to get those back because the reason we don't have aluminum smelting is because of the cost of electricity.
Now Alcoa produces half of the aluminum produced in the United States, 46 percent. They have three smelters, and they have one that's curtailed, which means it could open up if it wanted to. A 10 percent tariff is not enough to offset the increased price of electricity. So, what are we going to do? Go to 20, and 30 and 40 [percent] so that we have enough aluminum ingots made in the United States and at the same time continue to add to the price increases for automotive?
Ambassador Lighthizer assured the Senator that "there is no plan to go to 20, 30, 40 percent."
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There is a delightful YouTube video in which Richard Feynman - one of the rare household names in physics - fields a question on why magnets repel (or attract). It starts out with a variation on those endless "Why?" questions that parents first put up with and then miss. We mention it here because just the shortest swim in the on-line pool of stories about aluminum brought home to us how much we don't know about the subject and how difficult it is to put the above exchange in context. For the non-physicist, the Feynman clip underscores the same frustration.
Against the backdrop of that enormous caveat, we are not inclined to quarrel with or correct either the Trump Administration's decision to put tariffs on aluminum or Senator Alexander's critique of that action. But if this is painting by the numbers, we would like to add a few digits to the picture.
No. 1. Security Applications. We are not aware of any serious challenge to the Administration's assertion that aluminum has critical national security applications.
No. 2. Import Penetration. In its Section 232 Report on Aluminum, the U.S. Department of Commerce argued that U.S. imports of primary aluminum (ingots, we assume) has been rising rapidly, with import penetration now at 90 percent. And that
No. 3. U.S. Smelters. In one key respect the U.S. is down to 1 smelter. The Commerce Department wrote:
The U.S. has only two smelters that are operating at full capacity. Only one of these five smelters produces high-purity aluminum required for critical infrastructure and defense aerospace applications. ... Should this one U.S. smelter close, the U.S. would be left without an adequate domestic supplier for key national security needs.
No. 4. China and Russia. Inasmuch as national security is the premise for the tariffs at issue, it seems worth noting that China and Russia - the countries most frequently mentioned as potential military rivals to the United States-are respectively home to the world's largest and second largest aluminum companies: China Hongqiao Group Limited in China and United Company Rusal in Russia The latter is currently being sanctioned by the United States.
No. 5. Ingots. Clearly, as Senator Alexander explained, they are the industry's crown jewels. And, interestingly, they seem to be the one aluminum product China is not so keen to export. The Commerce Department report explains the situation this way:
China's industrial policy encourages development and domination of the entire aluminum production chain. These policies are further intended to stimulate the export of aluminum processed into sheets plates, rods, bars, foils, and other semi-manufactures and to target development of increasingly sophisticated and high-value product sectors such as automotive and aerospace.
Buts as for Ingots
: China imposes an excise tax that creates a disincentive for the export of primary aluminum ingots and billets. It provides tax rebates on exports of semi-finished or finished aluminum products.
No. 6. The Role of Canada. Canada's role is arguable even more significant with respect to aluminum than it is for steel. As Senator Alexander pointed out, with lots of water, hydro-power, Canada can make aluminum ingots more cheaply than they can be made in the United States, and Canada is a major source of primary aluminum for U.S. producers. The same point has been made repeatedly by the Aluminum Association, which had urged the Administration not to interfere with the aluminum trade between Canada and the United States.
That's probably enough about aluminum for today, but there are three more ingredients we would put into this stew. First, while focus on ingots is understandable, we see no reason to doubt the Administration's statements to the effect that it is concerned about downstream products as well. If you accept that concern as legitimate, then the number of jobs at issue jumps up considerably. 162,000 is the number the Aluminum Association uses.
Second, we think the jury is still out on the question of whether the incentive is now there for the U.S. to produce more primary aluminum. Certainly some press reports indicated that new capacity is coming on line.
Finally, Senator Alexander pointed to the high cost of electricity as a constraint on the production of primary aluminum in the United States. And energy production too has been in the news of late, most notably the new EPA directive to give local authorities more control over how U.S. power plants are operated. One has to wonder, how will that affect the aluminum equation?
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At Senate Appropriations is a link to the page video recording of the hearing held on July 26 by the Subcommittee on Commerce, Justice, Science, and Related Agencies, which is chaired by Senator Jerry Moran (R-KS). This was the source for today's featured quote.
There's Something There - Richard Feynman responds to a question on why magnets repel (or attract) one another.
The Report is a link to the Commerce Department's Report on "The Effect of Imports on Aluminum on The National Security," dated January 17, 2018.
Restart Today is a link to a MarketWatch story about the reopening of a Century Aluminum smelter in Hawesville, Kentucky.
Power from Coal is a link to a Wall Street Journal article on the new EPA directive mentioned above.
From the Aluminum Association takes you to the page on the Association's website with a letter to Treasury Under Secretary David Malpass, urging action on China's stunning overcapacity in aluminum. Mr. Malpass is conducting talks this week with Chinese officials in Washington for the negotiations.
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©2018 The Global Business Dialogue, Inc.
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R. K. Morris, Editor
Joanne Thornton, Associate Editor
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