US aluminium smelting industry decline likely to have far-reaching consequences

An important part of the dramatic shift in global aluminium supply seen this century is the decline of primary production in the USA. While production in the Middle East has jumped from 0.9 million tonnes (Mt) in 1999 to an expected 5.7Mt this year, and Chinese primary production has skyrocketed from 2.6Mt in 1999 to reach 31.2Mt in 2015, production in the USA has fallen from 3.8Mt in 1999 to an expected 0.7Mt this year. Analysts opine this major decline will likely have consequences over the long term.

According to them, the sources of this decline in US production are:

• The Pacific Northwest (PNW) energy crisis in the early 2000s,
• Low aluminium ingot price, and
• Loss of competitive position in the global industry.

Aluminium prices have been falling in real (inflation-adjusted) terms for decades. This secular decline is the result of a number of factors, but probably mostly driven by the lack of constraints on raw materials supply nor much upwards pressure on other key input prices.

Analysts claim, the competitive position and relative costs of US smelters has eroded significantly over the last decade due to:

• Stronger US dollar,
• Relatively old, less-efficient technology in the smelters, and
• Relatively high power rates.

The consequences of falling production in the USA come in two forms. The first is the loss of jobs, sales by suppliers (including power providers) and other benefits to the US economy.

The second consequence is more subtle. With rising consumption of primary aluminium from the auto sector and other markets combined with lower production, imports of aluminium ingot need to rise sharply.

An additional consequence could be political. Some will argue that subsidies in China have created the ingot price drop, which in turn is largely responsible for the decline of the primary aluminium industry in the USA and consequent damage to the US economy. Trade restrictions could emerge from Congress affecting aluminium as well as other commodities as a result.