LONDON (Reuters) - “This is not a China-phobic program, this has to do with a global problem.”
That was how U.S. Commerce Secretary Wilbur Ross described the latest investigation into his country’s aluminium imports.
This one has been launched under Section 232(b) of the Trade Expansion Act of 1962, which lets a president act against imports on national security grounds.
It follows hot on the heels of a similar Section 232 probe into U.S. imports of steel.
Although a Section 232 investigation is explicitly not supposed to be a substitute for trade complaints and despite Ross’s assurances it’s not about China, it’s hard to see this latest maneuver as anything other than exactly that.
Namely, another turn of the screw on the Chinese authorities to do something about the country’s overcapacity and its exports.
As such, it overlays the current specific investigation into imports of Chinese foil and intertwines with a broader generic complaint about alleged subsidies to the Chinese aluminium sector lodged by the Obama administration with the World Trade Organization (WTO).
How China responds to this mounting pressure is fast becoming the single most important question in the global aluminium supply chain.
U.S. Imports of Primary Aluminium - top 10 suppliers:
U.S. Imports of Plate, Sheet and Strip - top 10 suppliers:
The specific concerns behind this Section 232 investigation relate to the shrinkage of the U.S. aluminium smelter sector and its ability to produce enough metal to cover defense needs.
The United States has only five operating smelters and only one, according to Ross, capable of producing sufficiently high-purity aluminium for use in items such as combat aircraft.
As plants have closed, the country’s imports of primary aluminium have risen from 3.2 million tonnes in 2013 to 4.3 million tonnes last year.
The largest source of imported aluminium into the United States is Canada, unsurprising given its geographic proximity and a long shared aluminium history.
Russia and the United Arab Emirates have emerged as increasingly significant sources of primary metal as historically important suppliers in Latin America closed capacity.
China features very low on the list of U.S. primary imports, accounting for just 2,077 tonnes of last year’s tally.
Indeed, it’s questionable whether China has sufficient high-purity production capability to feed its own military needs.
If this were just about imports of primary aluminium, China would have nothing to worry about.
Except it’s not.
The steady decline in U.S. aluminium smelting is part of a broader retreat by just about every producing nation other than China, which has lifted its share of global aluminium production from around 25 percent a decade ago to in excess of 55 percent last year.
The transmission mechanism for Chinese oversupply to affect other producers comes in the form of exports - not of primary metal, but of semi-manufactured products.
Such exports have totaled more than 4 million tonnes in the last two years, serving in part to displace units from other producers.
The U.S. import picture looks very different, for example, when it comes to aluminium plate, sheet and strip. On this basis China has been by some margin the largest-volume supplier to the U.S. market in recent years.
Which is where this Section 232 investigation potentially dovetails with the WTO case.
The underlying question behind both is how China has expanded its control of the global aluminium supply chain at the expense of others, first and foremost the United States.
The charge in that WTO case is that it has done so through systemic subsidies of its aluminium sector.
China rejects all accusations of illegal subsidies.
But it has clearly been rattled by the latest developments, both in aluminium and steel.
Chinese Commerce Ministry spokesman Sun Jiwen said the country was seriously concerned about the new aluminium investigation.
The official China Daily newspaper reacted to the steel probe by warning against “unilateralism” and calling for the issue to be dealt with using the WTO dispute resolution process.
And in many ways, the accumulation of U.S. investigations into aluminium imports can best be seen as preparation for some tough future negotiations.
The Section 232 probe, in particular, injects a fast fuse into what would otherwise be a slow-burn affair at the WTO.
But what will China bring to any aluminium trade talks in its defense?
It would no doubt help China’s negotiating position, if it could already demonstrate that it was trying to tackle overcapacity in its aluminium sector.
This has been its stance on steel overcapacity and it looks likely that something very similar is going to be tried in aluminium.
The market has been jolted by a succession of announcements by Beijing policymakers.
First came the promise to close aluminium (and steel) capacity around Beijing over the winter heating season that runs from November to March.
Then came the order to stop work on around 2 million tonnes of new aluminium smelter capacity in the northwestern province of Xinjiang.
Most recently has come another directive, requiring every smelter to submit to a detailed audit to prove it is fully compliant with all planning and operational regulations.
It seems highly probable that not all of the current operating capacity in China will pass that audit process.
How much will close and how much will be shuttered over the next winter heating season are probably the hottest topics in the aluminium market right now.
Even the threat of closures has turned the light metal’s fortunes.
This time last year, aluminium was trading below $1,600 per tonne and widely forecast to fall further.
As of today, London aluminium is trading at $1,920 and widely expected to move higher.
The difference is “supply-side” reform of the aluminium sector in China.
Beijing has good domestic reasons, economic and environmental, to reform its domestic aluminium producers.
But make no mistake. The real urgency to tackle the sector’s problems has just been injected by the United States.
Editing by Dale Hudson