Australia / Analyst Insights
Changes to US tariffs indirectly affect local aluminium producers
by Nick Tarrant
Mar 20 2018

From 23 March 20Metal Gears18, the United States will impose unilateral tariffs of 25% and 10% on steel and aluminium products, respectively. Despite not extending to Australia, the tariffs could still have an effect on the Australian bauxite and aluminium sectors. Australia exported only 3.9% of its aluminium products to the United States in 2016-17, with the majority going to neighbouring Asian countries. Imports of aluminium products currently account for only 7.5% of domestic demand. However, higher tariffs from the United States could prompt overseas producers to shift their focus to other markets, such as Australia. This has the potential to increase import penetration, placing downwards pressure on local prices for aluminium products.

Bauxite is the major resource used to create alumina, an input used for aluminium-based products. Bauxite mining is concentrated in Western Australia and Queensland. Together, these states account for over 80% of production volumes. Nearly half of Australia’s bauxite is exported. Almost all of this is exported to China, at an expected 97.8% in 2017-18. Global bauxite shortages, due to a ban on Indonesian production from 2012 to 2017, along with increased demand from China, have benefited Australian producers over the past five years. The Bauxite Mining industry’s revenue is expected to grow strongly over the five years through 2017-18, at an annualised 6.2%.

Aluminium smelters make aluminium inputs for overseas metal fabricators, and for domestic construction, aviation and automotive industries. Unlike in other aluminium producing nations, Australian smelters benefit from having an abundance of locally produced alumina, which is linked to the country’s high-quality bauxite resources. Aluminium smelting is highly energy-intensive, with utilities accounting for an expected 39.7% of costs in 2017-18. Rising energy prices over the past three years have significantly pushed up the cost base for local manufacturers, threatening profitability. As a result of higher electricity prices, aluminium smelters have had to rely on government assistance to remain viable. Both the federal and state governments have offered assistance in order to secure local employment. For example, in January 2017, Alcoa accepted a government rescue package of more than $240 million in order to secure over 2,000 jobs at the Portland smelter in Victoria. The Australian Aluminium Smelting industry’s revenue is expected to decline at an annualised 4.2% over the five years through 2017-18. Despite the challenges facing the industry, the recent curtailing of aluminium production in China has boosted aluminium prices, providing some support for Australian aluminium smelter operators.

 

Relevant industries include:

Bauxite Mining
Aluminium Smelting