The Avoidable Destruction of an Iconic American Industry
As a result of China’s flooding the world market with cheap, state-subsidized aluminum and our president’s irrational aversion to fossil fuels, a 127-year-old American industry is in danger of disappearing. This week, the two largest primary aluminum producers in the United States announced curtailment of aluminum production at key smelters across the country. Alcoa announced that it was halting smelting operations at its Intalco Works (583 employees) and Wenatchee plants (428 employees) in Washington state, its Massena West plant in New York (500 employees) and that it was curtailing alumina refining capacity at its Point Comfort facility in Texas. Century Aluminum announced that it was cutting its aluminum production by one-third at its Sebree, Kentucky plant resulting in a loss of 150 jobs. In October, Century shut down 60 percent of its Hawesville, Kentucky smelter laying-off 320 workers. Century’s Mt. Holly smelter in Goose Creek, South Carolina which employs over 600 people announced that it will be closing at the end of the year unless it can negotiate a power contract with state-owned electricy provider Santee Cooper. The Mt. Holly smelter is the most modern and efficient aluminum smelter in the United States.
The primary factor at the heart of these curtailments is the declining price of primary aluminum which recently hit a six-year low on the London Metal Exchange or LME. Today, U.S. smelters lose money on each ton of aluminum they produce. Unlike a majority of industries that base the price of the goods they produce on costs, profit margins and anticipated growth, the price of aluminum is set by the LME and the costs incurred by smelters in its production have no effect on the price. Aluminum prices on the LME are based on worldwide supply and demand. So, why are aluminum prices declining?
There are two primary factors and both of them point directly to actions or inactions taken by the Obama administration. First, China has overproduced the metal in an overt attempt to drive down prices and force aluminum smelters offline. While U.S. aluminum smelters curtail operations, Chinese smelters have increased production by some 60 percent due to a cheap supply of state-subsidized electricity. Unlike the U.S., China is rapidly expanding its use of coal-fired power plants and is currently the world’s biggest consumer of coal. China increased new coal-fired electricity capacity by 55 percent in the first six months of 2015 as compared to the same period last year according to the China Electricity Council.
On the other hand, in the U.S., we are closing coal-fired plants at a rapid rate due to onerous regulations mandated by Obama’s Environmental Protection Agency (EPA). The EPA’s Clean Power Plan which aims to decrease the amount of greenhouse gases emitted by power plants by an average of 32 percent by 2030 will force many more coal-fired power plants to close beginning next year. According to the Sierra Club, in the last five years nearly 200 coal-fired power plants in the U.S. have closed or are in the process of closing because they are simply too expensive to operate. Conversion or construction of new natural gas-fired plants or nuclear power plants is expensive and will initially result in increased electricity rates for aluminum smelters at a time when cheaper prices are essential to saving the industry.
The making of aluminum is a power-intensive enterprise. It takes between 13 and 15 kilowatt hours of electricity to produce one kilogram (2.2 pounds) of aluminum. According to the U.S. Energy Information Administration, the typical American home uses almost 11,000 kilowatt hours of electricity each year. That amount of electricity would produce only about 1,700 pounds of aluminum. Modern aluminum smelters can produce upwards of 240,000 metric tons of primary aluminum each year and use over 3.3 billion kilowatt hours of electricity -- enough electricity to power over 300,000 average American homes for one year. To be profitable, it is critical that aluminum smelters purchase power at reasonable rates. Obama’s EPA is making that likelihood increasingly more difficult.
The other primary factor affecting the aluminum industry in the U.S. is China’s “dumping” aluminum on world markets. According to Robert E. DeFrancesco, Alan H. Price, and Adam Teslik of Wiley Rein, LLP, it has been reported that many Chinese primary aluminum producers have run their billets and ingots through nominal processing operations to avoid a 15 percent export tariff on raw aluminum and to take advantage of a 13 percent Value Added Tax rebate on semi-finished downstream products. Much of the Chinese aluminum that is exported as “extrusions” is therefore never intended for sale as such; rather it is simply melted down and recast as billets, ingots, or slabs in overseas facilities for sale in foreign markets. This unfair trade practice has resulted in a flood of cheap Chinese aluminum flowing into the U.S.
On October 22, the Aluminum Extruders Council filed a petition with the Department of Commerce against China Zhongwang Holdings Ltd., the world's second largest producer of aluminum extrusions, accusing the company of “systematically and illegally” evading duties on aluminum extrusions imported into the United States. China Zhongwang Holdings Ltd. has denied these charges. Nonetheless, the Department of Commerce must aggressively investigate these allegations and take quick and decisive action should wrongdoing be uncovered in order to “level the playing field” before it’s too late.
Sadly, one-third of all aluminum workers in the United States will soon be out of work because our government has made it virtually impossible to make a profit smelting aluminum today. And it’s not just the jobs and the loss of an iconic sector of our manufacturing heritage, it’s the higher prices that all of us will be paying for aluminum that will be imported from nations that don’t exactly like us a whole lot. In the very near future, the U.S. will be getting the aluminum it needs for its aerospace, automobile, defense, energy, manufacturing and construction industries from China, India, and the Middle East -- and it will be paying dearly for it in more ways than one.
We are on the brink of a new age of economic development in which aluminum will play a crucial role. Groundbreaking new uses for aluminum are being discovered every few months. How ironic would it be for aluminum smelters in the United States to close their doors forever just before a worldwide resurgence of interest in this versatile commodity?