COLUMN-Time to forget tariffs and reset U.S. aluminium policy: Andy Home

* U.S. primary aluminium production 2017-2020: https://tmsnrt.rs/3u67jJX

* U.S. unwrought imports 2013-2020: https://tmsnrt.rs/2NknG4U

By Andy Home

LONDON, Feb 19 (Reuters) - The new United States administration seems in no rush to lift the aluminium and steel tariffs imposed by Donald Trump in 2018.

Indeed, one of Joe Biden's first acts was to reverse Trump's final-hour lifting of tariffs on aluminium from the United Arab Emirates (UAE).

"The available evidence indicates that imports from the UAE may still displace domestic production and thereby threaten to impair our national security," he said, true to the spirit of the original Section 232 investigations.

But three years of tariffs have done nothing to boost national aluminium security.

The country's primary metal production is falling again. Manufacturers have been hit with higher prices, even for metal that isn't imported, while the politics around tariffs have occasioned an unseemly spat with ally Canada.

Biden has the chance to reset the country's aluminium strategy and the World Trade Organization (WTO) has obligingly given him time to do so, deferring a ruling on the tariffs until at least the second half of this year.

A coalition of aluminium-producing nations is hoping the United States will rejoin the fight against China, described by the U.S. Aluminum Association as "the single biggest threat to U.S. aluminum".

RISE AND FALL

The explicit aim of the tariffs was to enable the dwindling number of U.S. aluminium smelters to operate profitably and reopen idled capacity.

Capacity utilisation had fallen to only 39% in 2017 and the ambition was to lift that to 80%.

Post-tariff restarts by Magnitude 7 Metals and Century Aluminum (CENX) helped to nudge the dial upwards and annualised production rose to 1.15 million tonnes at the end of 2018 from 750,000 tonnes a year earlier.

However, Alcoa (AA) announced in April last year that it was mothballing its Ferndale smelter in the state of Washington with the loss of 230,000 tonnes of production capacity.

At the end of last year national annualised production had fallen to 920,000 tonnes and capacity utilisation to about 50%.

Equally significantly, there has been no sign of investment in new smelting capacity. The United States remains as dependent as ever on imports of primary metal.

Last year's imports of 3.5 million tonnes were down 11% on 2019, but the real driver was not tariffs, but rather the withdrawal of Russian producer Rusal from the U.S. market.

Russia was second only to Canada as a supplier to the United States until April 2018, when U.S. sanctions were imposed on Rusal and its owner Oleg Deripaska.

Although the sanctions were lifted in January 2019, it is clear that Rusal has defensively restructured its global sales. Russian imports have collapsed from 725,000 tonnes in 2017 to only 136,000 tonnes last year.

Shipments from Canada have filled the gap, with U.S. imports from its neighbour rising 10% in 2019.

BROKEN EXCLUSIONS

U.S. imports of semi-manufactured products dropped by a harder 20% last year. But here, too, the decline had less to do with tariffs than with the early-year COVID-19 demand collapse and targeted duties.

The United States imposed preliminary anti-dumping duties on imports of common alloy sheet from 18 countries in October last year, contributing to a 36% decline in imports under the "plate, sheet and strip" customs code.

Such product-specific duties have proved a lot more effective in stemming imports than the scattergun tariffs.

That's in part because of what the Aluminum Association has called a broken exclusions process.

"Through Dec. 3, the (Commerce) Department has granted this year alone Section 232 exclusions that cover 8.2 billion pounds of can sheet - more than 263% of the total annual market demand for can sheet in the United States," AA President and CEO Tom Dobbins wrote to outgoing Commerce Secretary Wilbur Ross in December.

If importers chose to use those exemptions to import tariff-free product, U.S. domestic demand would be zero for the next two years, he warned.

The number of exclusion requests for both aluminium and steel "now far exceeds 200,000 and is growing, and the process has been plagued by delays, questionable decisions and a complete lack of transparency", according to the Coalition of American Metal Manufacturers and Users (CAMMU).

CAMMU, a coalition of associations representing more than 30,000 companies and a million workers, is calling for President Biden to end steel and aluminium tariffs. The AA wants more "targeted trade enforcement".

Both think the new administration should, in the words of CAMMU, now focus on "re-engaging with our trading partners on a coordinated response to address the root cause of global oversupply in steel and aluminum: excess capacity in China".

BACK TO THE NEGOTIATING TABLE?

Donald Trump's decision to impose unilateral tariffs stopped in its tracks a multinational campaign to tackle China's over-production and massive exports of aluminium.

One of the parting shots of the Obama administration was the January 2017 filing of a complaint with the WTO, accusing China of illegal state support for its aluminium sector.

More ammunition has come from a 2019 OECD report, which found that subsidies were not uncommon along the aluminium value chain but that they were "most pronounced in China", conferring a cost advantage to Chinese producers and exporters of aluminium in semi-manufactured form.

The stage, in other words, is set for a government-to-government conversation with China, if the United States chooses to return to its place at the negotiating table.

The timing for renewed engagement could be highly propitious, given China's leadership is facing a tough trade-off between its new commitments to climate neutrality and a strategic industrial sector that remains overwhelmingly reliant on coal for its power.

However, a pivot back to the international stage is going to be difficult while tariffs remain in place on key negotiating partners such as the European Union and Canada.

Particularly the latter.

Last year's tariff tussle was political turbulence. The economic reality, as even the original Section 232 report noted, is that Canada "is highly integrated with the U.S. defense industrial base and considered a reliable supplier".

Canada has twice as many aluminium smelters as the United States and potentially room for more. U.S. national champion Alcoa (AA) is now operating more smelter capacity across the border than on its home turf.

If the United States is committed to maintaining domestic production, it may need to be more creative and borrow from the rare earths playbook, where the Department of Defense is providing direct funding.

A domestic rethink needs to be part of a broader reshaping of strategy on how best to achieve national aluminium security. Because the past three years have shown that tariffs aren't the solution.

(Editing by David Goodman)

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