Politics, pandemics and Russian aluminum: why Canada faces fresh U.S. tariffs

WASHINGTON —
Why the United States chose to taint the debut of North America’s celebrated new trade deal by threatening fresh tariffs against Canadian aluminum, only President Donald Trump and trade emissary Robert Lighthizer can say for sure.

But industry insiders point to a convergence of disparate factors: COVID-19, international metals arbitrage, presidential politics and $16.3-billion worth of the stuff from Russia, the world’s second-largest producer.

Aluminum is one of the elemental components of the Canada-U.S. trade relationship, a bond forged in the blast furnace of the American war effort. Experts say smelters on both sides of the border stand to benefit from the U.S.-Mexico-Canada Agreement, which took effect Wednesday and imposes new requirements for regionally sourced metals.

Jean Simard, president and CEO of the Aluminum Association of Canada, is at a loss to understand why his industry is being targeted by the White House for the second time in two years. The U.S. has nowhere near the capacity to meet growing demand.

“It doesn’t make sense,” Simard said. “It’s like an oxymoron. It’s so contradictory to the spirit of USMCA.”

The answer may lie in how aluminum production works around the world, and how traders and marketers profit from it.

Because they traffic in white-hot liquid metal, aluminum smelters can’t simply shut down when demand for the product dries up, which is what happened to Canadian producers — who provide the bulk of the metal to U.S. markets — when the pandemic forced auto manufacturers to idle their assembly lines.

Smelters pivoted away from the specialized premium products demanded by the auto sector and instead produced the more generic primary aluminum known as P1020, shipping it to the only storage warehouses that are cost-effective, Simard said: facilities in the U.S., which is where the lion’s share of the North American aluminum market is located.

The ensuing “surge” in Canadian imports caught the attention of the U.S. trade representative’s office — or more specifically, the two U.S. producers that raised a red flag: Century Aluminum and Magnitude 7 Metals, which together comprise a Trump-friendly lobbying effort known as the American Primary Aluminum Association.

“The surge of Canadian metal has a caused the price to collapse and is endangering the future viability of the U.S. primary industry,” the association wrote to Lighthizer in May.

“Action — real action, not mere monitoring, and endless discussions in multinational fora — is needed now if the United States is to save what is left of its primary aluminum industry.”

A separate group — the Aluminum Association, which represents dozens of U.S. and international producers — disagrees, calling Canadian suppliers an integral element of the North American supply chain and a key component of the industry’s success.

Politics is undoubtedly a factor: two of Century’s four smelters are in Kentucky, while Magnitude 7 operates in Missouri, two states vital to Trump’s electoral fortunes.

“These are the states that keep campaign managers up at night,” said Gerald McDermott, an international business professor at the University of South Carolina.

A spokesman for the American Primary Aluminum Association did not immediately respond to a request for comment Friday.

Glencore Plc, a metals trader and producer based in Switzerland, holds a 47 per cent stake in Century. Magnitude 7, founded by a former Glencore aluminum trader, operates a single Missouri plant that won a new lease on life after Trump’s first round of tariffs in 2018, but which warned in February it was on the verge of shutting down.

And Glencore holds the exclusive rights to sell Russian-made aluminum in the U.S., having agreed in April to spend $16.3 billion over the next five years on up to 6.9 million tonnes of the metal from Rusal, the second-largest aluminum producer in the world.

Glencore is also a major player in the world of metals arbitrage — buying commodities at the lowest price possible, then shipping and storing them before selling on a futures contract in hopes of a higher price. The pandemic has fuelled a global collapse in the price of aluminum, Simard said, while the threat of tariffs has had the opposite effect.

“What do the traders do? They buy the metal at a very low price because the crisis is what brought you to pivot to this position, and they warehouse it when interest rates are very low because it’s a crisis,” Simard said.

“The key player over and above everybody else is Glencore.”

Rusal, once controlled by the Russian billionaire oligarch Oleg Deripaska, was subject to U.S. sanctions since Moscow’s annexation of Crimea in 2014 — sanctions that were lifted in January 2019 as part of an extensive restructuring that saw Deripaska relinquish control of the company. Glencore was involved, too, swapping shares in Rusal for a direct stake in its parent company, En+.

The USTR and the Trump administration “cannot be unaware of the corporate structure around Rusal and Glencore. I would doubt it very much,” said Simard.

A spokesman for Glencore declined to comment Friday.

The Canadian aluminum industry, the bulk of which is located in Quebec, owes its origins to soaring American demand for the metal in the months prior to the U.S. entry into the Second World War — a partnership that cemented Canada’s role in the continental military industrial base. Is the Trump administration trying to end that relationship?

“It’s worth raising the question,” Simard said.

Trump’s disdain for Canada and Prime Minister Justin Trudeau has long been an open secret — “Trudeau’s a ‘behind-your-back’ guy,” former national security adviser John Bolton’s explosive new book quotes the president saying — and with an uphill battle for re-election looming, he may be looking to score political points, McDermott said.

“Why is the Trump administration doing what it’s doing? The short answer is it’s in a free fall,” he said.

“It’s got to show that it’s doing something for these Midwestern manufacturing states, and that means getting tough with non-U.S. people. What better thing, then, to piss off the Canadians?”

This report by The Canadian Press was first published July 3, 2020.