After receiving a stay of execution on punitive import tariffs imposed by the United States the Canadian aluminum industry can breathe a little easier, but companies are unlikely to make major investment decisions under the status quo.
On Thursday, U.S. President Donald Trump exempted Canada and Mexico from new 10-per-cent aluminum tariffs that will soon apply to the rest of the world.
The final outcome for Canada will depend on how the ongoing North American free-trade agreement talks proceed, the President said.
Mr. Trump justified the tariffs on national security grounds, specifically the need to secure a domestic supply of metals such as aluminum, for the manufacture of military equipment.
Canada – historically a staunch U.S. military ally – is the largest supplier of aluminum to the United States, accounting for 44 per cent of its imports, according to TD Securities Inc. The Canadian aluminum industry employs roughly 10,000 people at 10 smelters, nine of which are in in Quebec. About 80 per cent of domestic production goes to the United States.
Canadian-based producers have spent $13-billion over the past 15 years to modernize smelting facilities. Rio Tinto PLC alone spent about $6-billion to upgrade its Kitimat smelter in British Columbia. Just last month, the Australian-British giant announced a $250-million investment in a Quebec alumina refinery.
But the state of limbo over the tariffs means the industry is unlikely to pull the trigger on any major new investment until there is certainty, said Jean Simard, chief executive of the Aluminium Association of Canada (AAC).
"We shall employ ourselves over the next weeks, together with our Canadian and Quebec governments and our U.S. allies, to find a pathway towards a full and permanent exemption," Mr. Simard said in a statement on Thursday.
If the United States ultimately imposes the new tariffs on imports of Canadian aluminum, the AAC pegs the economic impact at US$700-million, half of which it expects to be absorbed by the primary aluminum producers, and the rest by end customers, such as U.S. auto and aerospace manufacturers.
Apart from Rio Tinto , the major players in Canada are U.S. firm Alcoa Corp. and Canadian company Aluminerie Alouette, which operates the largest smelter in the Americas, in Sept-Îles, Que. That facility produces about 600,000 tonnes of primary aluminum a year, and employs more than 900 people. Alouette is privately held and owned by a small group of shareholders, which include Rio Tinto and the Quebec government.
While not as competitive as China, Canada has a big cost advantage over the United States because of its access to cheap electricity, particularly hydro power in Quebec. Aluminum production is extremely energy-intensive.
Canadian smelters are also much more modern than their U.S. counterparts. The average age of a U.S. facility dates from the 1970s, according to the AAC. Canadian smelters are 1990s-era. Chinese facilities date from the 2000s.
"The Chinese are going around in a Tesla, whereas the U.S. is going round in an old Chevy," Mr. Simard said.
While China has flooded the global market with cheap aluminum over the past decade as new production has come online, it does relatively little business with the United States, accounting only for about 8 per cent of U.S. aluminum imports. Consequently, the new Trump tariffs won't be overly damaging towards China.
"President Trump's 10 per cent tariff on aluminum imports is unlikely to have a large direct impact on Chinese export activity, as they will likely increase exports to other regions where the majority of exports are sold anyways," Bart Melek, head of commodity strategy with TD Securities, said in a note to clients on Thursday.
However, trade uncertainty is weighing on global aluminum prices. As recently as three weeks ago, aluminum futures were trading at a six-year high of around US$2,250 a tonne on the London Metals Exchange. Prices have since fallen by about 7.5 per cent.