US-China trade spat could hollow out India’s downstream aluminium

US-China trade spat could hollow out India’s downstream aluminium

Mounting concerns over the trade war between the US and China have sent jitters across global financial and commodity markets. The imposition of billions of dollars worth of tariffs by Washington on Beijing, followed by the knee-jerk retaliation by the Middle Kingdom have sent metals markets into a tizzy. Repercussions of the US-China tussle have been seen in the aluminium markets as well, both on supplies and price swings.

In India, the threat of rising imports and unsolicited dumping is more pronounced – not just from China but from the swelling volumes of aluminium scrap coming from the US. Between April and June 2018, scrap imports from the US zoomed 128 per cent. India’s overall scrap imports have risen 24 per cent year-on-year (y-o-y) so far. Between April and July this year, total scrap imports by volumes reached 0.41 million tonnes. Data drawn from the Aluminium Secondary Producers’ Association (ASMA) show India imported 0.86 million tonnes of scrap in FY 2014-15 which grew to 1.11 million tonnes in 2017-18, thus rising 29 per cent in three years. Because of higher import duties in China, scrap prices are expected to remain almost at the same level and will be driven mostly by LME (London Metal Exchange) aluminium prices. China hardly exports scrap to India but finished aluminium products are shipped on a large scale by the Asian giant.

Aside from aluminium scrap, India has been battered by an uptrend in imports of wire rods and aluminium alloy ingots from the Association of South East Asian Nations (ASEAN) region. India has free trade agreements (FTAs) with the countries comprising ASEAN- hence, there is duty free trading of goods. Such countries are also noted for their production of value added aluminium products and are suppliers to other consuming destinations as well. According to data from the Aluminium Association of India (AAI), inflows of wire rods from ASEAN countries have galloped 200 per cent between April and June this year.

Why is the deluge of imports rattling domestic producers?

Primary aluminium producers in India have attributed the surge in imports to prevailing geopolitical equations between US and China. Imports are steadily eating into the market share of domestic makers. At the end of June 2018, imports held a staggering share of 60 per cent of the country’s internal aluminium consumption, at a time when demand is on a strong wicket – it grew 10 per cent y-o-y during the April-June period to 0.92 million tonnes. Domestic consumption of primary aluminium metal has risen from 1.58 million tonnes in FY 2014-15 to around two million tonnes in 2018. A forecast by ratings agency CRISIL has pegged the country’s future aluminium consumption to climb to 5.3 million tonnes by FY 2020-21. Demand for aluminium is expected to be propelled by sectors like power, aerospace and defence which is opening up and expanding opportunities for makers of aluminium alloys, extrusions and additives. What’s more, the demand for flat rolled products is growing and has touched 650,000 tonnes per year. Consumption of flat products is driven by foils and transport sector.

But domestic producers are worried that the growing aluminium demand would be tapped by foreign producers, given the trade conflict between China and US. Bruised by the White House’s trade barriers, Beijing has redirected to India low cost imports of fake semis (semi-fabricated products) and wire rods. Based on current trends, Indian aluminium manufacturers feel they are hugely vulnerable to heightened dumping from China.

Amid confirmed threat of imports, the aluminium producers in the country are lobbying with the Federal government to wholly exclude the metal from the purview of negotiations of Regional Comprehensive Economic Partnerships (RCEP). They argue that, barring that, the domestic aluminium industry, especially the downstream sector, are staring at an imminent shutdown. The RCEP is a bloc of 10 ASEAN Group members – Brunei, Cambodia, Indonesia, Malaysia, Myanmar, Singapore, Thailand, Philippines, Laos & Vietnam and their six FTA partners – India, China, Japan, South Korea, Australia and New Zealand. India has trade deficit with 10 of these countries, China, South Korea and Australia included.

The Downstream Aluminium Operations – Fragmented & Stifled

The Indian downstream industry is made up largely by small to midsized players engaged in production of extrusions, rolled products, cables & conductors, auto castings and utensils. A plethora around 3500 companies dot the downstream manufacturing space. However, they operate at depleted levels, utilising barely 55 per cent of their nameplate capacities. The sore point is the availability of raw materials at competitive prices. ASMA alleges the supply of raw material is dictated by the three large primary producers – Vedanta, Hindalco and the state sponsored National Aluminium Company (Nalco). Thus, the major players in downstream aluminium making are sandwiched between the big raw material supplies and their unorganised peers who pose a stiff competition for survival. Since primary producers have also doubled up as downstream makers, the margins of the smaller operators are under stress. And, the latest assault from imports has raised questions on the competitiveness of the full-time downstream producers.

Changing policy tack to save downstream operations

The AAI feels the Indian government needs to protect its indigenous aluminium industry the way US and China are doing: by using duty levies. The association has called for quantitative curbs on imports of aluminium, that could be extrapolated by arriving at an average of three years of import volumes. By classifying aluminium as a core industry, abolishing inverted duty structures and hiking customs duties on imports of aluminium end use products, thousands of secondary producers can be protected.

For comparison, China does not encourage the exports of raw materials and minerals needed in the aluminium value chain by levying an export duty of five per cent. And, to encourage exports of downstream material like extrusions and rolled products, Beijing provides a subsidy of 13 per cent. Even in India’s neighbouring countries, the import duty on aluminium is five per cent, which is further strengthened by a 15-25 per cent duty on imports of downstream products. By contrast, the duty structure in India is lopsided – imports of primary aluminium metal and downstream products are taxed alike at 7.5 per cent. If the Indian government is serious about saving its downstream ecosystem, import duties on finished aluminium products should be raised to 20 per cent. Next, an additional levy of 15 per cent on Chinese aluminium products could counter Beijing’s export incentive and bail out the Indian aluminium downstream industry.

Moving ahead, the government and public sector entities that fall under their purview can be mandated to source their aluminium products only from domestic manufacturers. Such policy interventions can contribute towards expanding the operations of secondary aluminium producers and stave off the pitfalls from a global trade war. It will also inexorably boost India’s aluminium consumption.