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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Century Aluminum Company    CENX

CENTURY ALUMINUM COMPANY

(CENX)
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Politics trumps aluminium as U.S. reimposes Canadian tariffs: Andy Home

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08/16/2020 | 10:00pm EDT

(Repeats from Friday. The opinions expressed here are those of the author, a columnist for Reuters.)

* U.S. Imports of Canadian aluminium: https://tmsnrt.rs/2YTWhbE

* U.S. Midwest Premium: https://tmsnrt.rs/2Y2p6TJ

LONDON, Aug 14 (Reuters) - The United States will reinstate tariffs on imports of Canadian primary aluminium this weekend.

This is not unexpected despite a ferocious rearguard lobbying campaign by a broad spectrum of U.S. consumers.

Aluminium has been a pillar of the Trump Administration's "America First" trade agenda from the start. Along with steel it was early designated a sector critical for national security, leading to the imposition of 10% tariffs on imports in 2018.

Unfortunately, the pillar is wobbling.

Alcoa is curtailing its Ferndale smelter in the state of Washington, reducing the number of domestic operating plants to six. Century Aluminum, which operates three smelters and has led the lobbying charge against Canadian imports, has just announced a quarterly loss of $26.9m.

Another smelter casualty in a U.S. election year would be a public relations disaster.

However, Canada is being made the scapegoat for market forces determined first and foremost by China, the world's largest producer and exporter of aluminium.

This trade skirmish between Western allies reinforces the sense of missed opportunity in tackling China's growing dominance of the global supply chain.

BATTLE OF THE SURGE

The reimposition of tariffs on Canadian primary unalloyed aluminium is down to what President Trump described as "a surge" of imports since Canada was exempted in May last year.

Pro- and anti-tariff lobbyists have waged statistical war over this apparent "surge".

Canada has historically been the largest supplier of primary aluminium to the U.S. market with volumes fluctuating significantly between 2.00 and 2.50 million tonnes over the last five years.

This historical volatility allows both sides to use the same data to come up with diametrically different conclusions.

But even if there has been a "surge" of imports in recent months, it's been driven by market rather than tariff forces.

Demand imploded in the United States in the first half of 2020 as lockdowns and quarantine measures hit both automotive and aerospace sectors.

Aluminium smelters responded by maintaining throughput but switching production from customer-tailored alloys to "commodity-grade" metal. This can be sold more easily to the merchant market or to the market of last resort, namely the London Metal Exchange (LME).

The last global crisis of 2009 saw huge amounts of metal migrate towards LME warehouses in Detroit.

A similar pattern is emerging this time. Although LME warehouses in Detroit currently hold no warranted metal, aluminium is accumulating in the statistical shadows.

The LME's new report on shadow stocks shows 120,000 tonnes sitting in Detroit at the end of June, up from 67,000 tonnes at the end of March. That's metal that is being stored under contracts referencing LME delivery. There may be still more outside of that reporting net.

There are no LME delivery locations in Canada and it is quite possible that some of the import "surge" has simply been metal heading for exchange storage and financing rather than competing with U.S. production.

It's telling that the Trump Administration has slapped tariffs back only on unalloyed metal, presumably because alloy imports have fallen during the demand meltdown.

US CONSUMERS PAY THE PRICE

The market has been quick to price in the Canadian tariff move.

U.S. consumers pay both the basis LME price and a premium for Midwest delivery. The latter, traded on the CME as an index linked to S&P Global Platts' assessment of the domestic market , has surged from 8 cents per lb in May to over 15 cents.

This is pretty much the level identified by analysts at Citi as the required price to incentivise imports to the U.S. domestic market, which remains, tariffs or no tariffs, dependent on flows of both primary aluminium and products. ("The Aluminium Book: A New Era for Aluminium", Aug 2, 2020).

U.S. consumers have to absorb this higher price, whether they buy tariffed or tariff-free metal. They even pay it if they use domestically-sourced scrap, as can manufacturers have discovered to their cost.

This is the way tariffs work. Any producer of any commodity will seek the highest potential price afforded by trade restrictions.

As a grouping of U.S. users ranging from the Beer Institute to the National Association of Trailer Manufacturers noted in a July 20 letter to the White House, "this money goes to the seller, not the Treasury, and payment of the premium is non-negotiable."

NO VIABLE STRATEGY

It's a price worth paying, according to the Coalition for a Prosperous America (CPA), a vocal proponent of Trump's "America First" trade policies.

The CPA concedes that China's huge flow of exports has been the root problem for U.S. producers in recent years but no-one has come up with "a viable strategy for reducing China's oversupply," according to CPA chief economist Jeff Ferry, writing in support of renewed Canadian tariffs.

In truth, though, the United States has missed two prime opportunities to tackle China's over-production.

The previous administration's parting shot on the issue was a full-blooded complaint to the World Trade Organization (WTO), which could have formed the platform for the sort of multilateral pressure that led to China cutting 150 million tonnes of steel production capacity.

However, this administration doesn't do the WTO or anything associated with President Barack Obama.

The second opportunity came from the Commerce Department's landmark January 2018 report finding that aluminium was critical to national security and that import restrictions were needed.

One option suggested was penal tariffs of 23.6% on imports from China, potential transhipment countries Hong Kong and Vietnam, as well as Russia and Venezuela.

The U.S. could have directed its considerable trade firepower at the source of the global oversupply problem.

Rather, President Trump chose the path of blanket tariffs at 10%, rounding up Commerce's suggested 7.7% duty and paving the way for the sort of friendly-fire dispute currently playing out with Canada.

Canada has already vowed to respond in kind to the reimposition of tariffs on its exports, which is how trade restrictions tend to multiply.

Both U.S. and European aluminium sectors are launching ever more anti-dumping cases against specific aluminium products as they play whack-a-mole with Chinese exports.

The European Union has just initiated a probe into imports of Chinese flat-rolled products.

The U.S. Commerce Department last week determined in favour of countervailing duties on imports of alloy sheet from Bahrain, Brazil, India and Turkey. This is product in all likelihood displaced by Chinese exports in other regional markets.

What's missing is a "viable strategy".

A change of administration might just possibly give the United States a third opportunity to tackle China head-on about its aluminium dominance.

But time is running out.

China's huge and still-growing aluminium smelter sector broke another monthly production record in July.

(Editing by Jane Merriman)


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CENTURY ALUMINUM COMPANY -7.77% 6.455 Delayed Quote.-6.72%
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Financials (USD)
Sales 2020 1 626 M - -
Net income 2020 -91,7 M - -
Net Debt 2020 253 M - -
P/E ratio 2020 -7,42x
Yield 2020 -
Capitalization 627 M 627 M -
EV / Sales 2020 0,54x
EV / Sales 2021 0,50x
Nbr of Employees 2 079
Free-Float 52,0%
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Mean consensus HOLD
Number of Analysts 3
Average target price 6,00 $
Last Close Price 7,01 $
Spread / Highest target -0,14%
Spread / Average Target -14,4%
Spread / Lowest Target -42,9%
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NameTitle
Michael A. Bless President, Chief Executive Officer & Director
Andrew Gordon Michelmore Non-Executive Chairman
Jesse E. Gary COO, Secretary, Executive VP & General Counsel
Craig C. Conti Chief Financial Officer & Executive Vice President
Jarl Berntzen Independent Director
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