Calls for tariffs on Canadian aluminum come with a Glencore twist

Calls for tariffs on Canadian aluminum come with a Glencore twist

Financial Post

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The U.S.-Mexico-Canada Agreement was supposed to mark a new era in trade relations between Ottawa and Washington. Instead it came into force on July 1 overshadowed by the Trump Administration’s threats to re-impose tariffs on Canadian aluminum.

While political analysts have speculated about whether the tough talk, which began last month, may have had more to do with re-election campaigning than economic policy, inside aluminum industry circles the possibility of new tariffs has raised eyebrows for other reasons.

That’s because one of the world’s largest commodities players, Switzerland-based Glencore Plc — which mines nickel, copper, zinc and thermal coal in Canada and has partnerships worth billions of dollars with some of this country’s largest pension plans — is a major investor in a Chicago-based aluminum producer closely tied to the tariff fight.

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Century Aluminum Co. is one of two aluminum producers represented by an industry group called the American Primary Aluminum Association (APAA), which has lobbied the Trump administration for the new tariffs, claiming in a July 7 press release that “the behaviour of the Canadian aluminum industry … is threatening American aluminum jobs.”

Glencore is Century’s largest investor, controlling a 47 per cent stake, including all of its Series A convertible preferred stock. It also holds a seat on the board of directors.

Although Glencore does not produce any aluminum itself, it is a major trader of the metal, and earlier this year struck a multi-billion dollar deal to buy from a Russian producer, one of the world’s largest, over the next few years.

“If you understand the aluminum market, then you can see how Glencore can benefit from (tariffs on Canadian aluminum)”, said Jean Simard, president and chief executive of the Aluminum Association of Canada, in a recent interview.

“They’re traders, so they’re moving metal, and so their incentive is to make the highest margins, so if the price goes up, they make … (more) money.”

A Glencore spokesman declined to comment for this article while both Century and APAA did not respond to requests for comment.

The U.S. has long relied on other countries to source aluminum to meet demand for its automotive, construction, beverage can and other sectors. In recent years, Canada has consistently supplied about half of the country’s aluminum.

But in May, the APAA — which was founded in 2018 by Century, and another U.S. producer, Magnitude 7 Metals LLC — launched a campaign called Aluminum Now. It enlisted prominent Democrats and Republicans, including former U.S. Senator Evan Bayh and former Arkansas Governor Mike Huckabee, to push the idea that the Canadian aluminum sector has been thriving at the expense of the U.S. sector.

Specifically, the campaign argues that the Canadian government is subsidizing its aluminum sector and that its metals are depressing prices in the U.S.

“The surge in Canadian imports is destroying the U.S. primary aluminum industry and putting thousands of jobs on the line,” the APAA said in a press release on July 2.

The campaign seizes on recent history and agreements between the two countries: In 2018, the Trump Administration imposed Section 232 tariffs, which applied 10 per cent tariffs to a long list of countries’ steel and aluminum imports. In May 2019, the U.S. lifted the tariffs but said it could reimpose them if Canadian aluminum imports “surge meaningfully” over a period of time.

This week, the APAA said Canadian aluminum imports had surged in May to the highest levels since the U.S. lifted tariffs — about 37 per cent above the monthly average since the tariffs were lifted, according to APAA data.

But the idea that Canadian aluminum volumes have surged overall is contested by a different industry group, the Virginia-based Aluminum Association, which represents more than 120 companies in the aluminum supply chain. Its president, Tom Robbins, wrote an open letter in June opposing new tariffs, saying that Canadian aluminum volumes flowing into the U.S. have barely budged during the past three decades.

During that time, Canada, on average, accounted for 64.6 per cent of annual U.S. aluminum imports, and, in the first quarter of 2020 accounted for 64.7 per cent. While aluminum volumes have increased since the tariffs were lifted, he attributed the rise to the July 2019 restart of a smelter in Quebec that had been closed during a labour strike.

“The restart has, to a large extent, displaced imports from other countries in the Middle East and Asia,” Robbins wrote, adding that Chinese-state subsidies to its aluminum sector present a pressing problem.

According to Wenyu Yao, a senior commodities strategist at ING Bank NV, the volume of Canadian aluminum imported into the U.S. actually dipped in the first quarter of 2020, to less than 400 kilotons from around 600 kilotons in the fourth quarter of 2019.

Yao said that a benchmark price of aluminum in the U.S., known as the Midwest Premium, had been trending downward since last May, when the U.S. lifted tariffs, but noted that forward prices have recently shot up, something she attributed to the renewed speculation about tariffs.

“The U.S. Midwest premium that the buyers and end-users will have to pay on top of the aluminum prices, has risen in the forward market, even though the physical market outlook has been depressed by the COVID-19 pandemic,” she wrote in late June, noting that the September and November contracts prices both spiked to US$13.5 cents/lb one day in late June, up from around 9.5 cents in May.

If aluminum prices rise, Century stands to gain — it could sell its product for a larger profit.

At the moment, it is trying to expand its largest U.S. smelter, known as Hawesville after the Kentucky town where it’s based. Glencore has given the company an unsecured US$40 million loan to help finance the project.

In addition, in June, Glencore agreed to purchase US$95 million in 12 per cent senior secured notes due 2025.

The loans are just one aspect of the relationship between the two companies. Wilhelm van Jaarswald, the asset and investment manager of Glencore’s aluminum and alumina department, holds one of the six board seats at Century and, in 2019, 65 per cent of Century’s revenues came from trading alumina and aluminum with Glencore.

To be sure, Century, with around US$650 million in market capitalization on the Nasdaq exchange, represents just a small part of Glencore’s vast business operations.

The sprawling US$30 billion company is headquartered in Baar, Switzerland, registered in Jersey and listed on the London Stock Exchange but operates in 35 countries and posted US$215 billion in revenue in 2019.

“In terms of its scale and success, it’s arguably unique,” Edward Sterck, an analyst at BMO Capital Markets, said about Glencore, noting no other mining company also operates a comparable trading business, which spans metals to agricultural commodities.

Glencore is also no stranger to Canada, having done extensive business with this country’s largest pension funds in addition to its operations in the country.

In 2016, Glencore sold a 40 per cent equity stake in Glencore Agricultural Products, a logistics company that trades agricultural commodities, for US$2.5 billion to the Canada Pension Plan Investment Board. The same year, the British Columbia Investment Management Corporation also bought a 9.9 per cent stake in the asset for US$624 million.

And in 2017, the Ontario Teachers Pension Plan put down an initial US$150 million to launch a joint venture with Glencore to invest in base metals, such as copper and nickel.

CPPIB, BC IMC, and OTPP declined requests for comment about Glencore and the lobbying campaign for U.S. tariffs on Canadian aluminum.

Glencore’s investments and partnerships, however, span the globe.

When it comes to aluminum, it has close ties with Russia’s United Company Rusal Plc, one of the largest producers in the world.

In 2018, after the U.S. imposed sanctions on Russian companies, Glencore’s chief executive Ivan Glasenberg resigned from the board of Rusal, and the company said it was evaluating its ties, which included “various contracts for the purchase of alumina and aluminum.”

Earlier this year, Rusal announced that it had struck an agreement in which Glencore would “market,” or trade its aluminum. Under the deal, Glencore would buy roughly 6.9 million tonnes of aluminum from Rusal, between now and 2024 or 2025, a deal valued at around US$16.3 billion.

Glencore also holds a stake in Russian energy and metals company En+, which owns roughly 57 per cent of Rusal.

Russian aluminum is already subject to the 10 per cent U.S. tariffs, amid its own rocky diplomatic relationship with Washington.

Yao, of ING, said if tariffs are imposed on Canadian aluminum, volumes into the U.S. would likely decline, but that it would take time for new domestic production to come online there.

The aluminum market is considered to be in surplus, and the low prices would likely deter the type of investment needed to reopen new smelters, she said.

“Someone is going to fill the hole, either from the Middle East, or other places,” she said.

At the moment, Canada continues to push back on U.S. talk of imposing tariffs on its aluminum sector, which is the fifth largest in the world and encompasses 8,700 jobs at nine smelters, all located near cheap hydroelectric power in either Quebec or British Columbia.

The timing of potential tariffs also remain hazy, especially as the new North American Free Trade Agreement between Canada, the U.S. and Mexico just took effect on July 1.

Relations between Ottawa and the White House remain tense after Prime Minister Justin Trudeau declined to meet this past week with Trump and Mexican President Andres Manuel Lopez Obrador to commemorate the pact.

Eric Miller, a Washington, D.C.-based fellow at the Canadian Global Affairs Institute, and a trade consultant to companies through Rideau Potomac Strategy Group, said he believes the Trump Administration did not want to overshadow its trade deal with Canada and Mexico by imposing tariffs right now.

But Miller said he believes that the Trump Administration is more likely than not to impose tariffs later this summer.

“The administration looks like it’s holding off a little but, but once you get into August, and you’re in the thick of the presidential election,” he said, “the politics of this, taking so-called tough action, will only increase the desire to act.”

• Email: gfriedman@postmedia.com | Twitter: GabeFriedz

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