A comprehensive overview of the aluminium industry at global level and in the European Union by strongly focusing on downstream segments
by Mario Conserva (President METEF), Cesare Pozzi and Ernesto Cassetta (Gruppo di Ricerche Industriali e Finanziarie GRIF “Fabio Gobbo”, LUISS Guido Carli University, Rome)
The aluminium industry is essential to the economies of modern countries and it provides a range of highly differentiated products, from the intermediate semis required for many high-tech industries to parts and components for final applications. The shape of the European Union (EU) aluminium industry has significantly changed both externally and internally in the last few years. Since 2008, the European Commission has shown increasing concern for the aluminium industry and other non-ferrous metals, such as copper and zinc, renewing interest in the need for industrial policy measures for the European economic relaunch. Moreover, the aluminium industry has been recently at the core of the international debate on protectionism measures and on the role of trade policies to drive economic development. No doubt that the policy attention has been mainly paid to the upstream segment of the industry, whereas the fundamental role played by downstream segments (using unwrought aluminium to produce a wide range of products that in turn are growingly employed in many industries), have been often neglected. The aim of this paper is:
to provide a comprehensive overview of the aluminium industry at global level and in the European Union by strongly focusing on downstream segments;
to assess the effectiveness of the current EU policies with a specific attention to trade policies and its impact on the aluminium industry;
to provide industrial policy suggestions and recommendations to foster the competitiveness of the aluminium industry also at the light of concomitant trends at global level.
The aluminium industry in the European Union
The European aluminium industry today includes over one thousand companies involved in the primary and secondary production of this metal and its transformation in a wide range of semis. The European Aluminium association EA estimates the overall revenues of this industry in the old continent at 39.5 billion euro in 2015 (an increase of over 36% in the 1997-2015 period) with an added value of about 11.5 million euro in the same year.
The EU aluminium industry encompasses more than a thousand companies involved in the metal processing and in the manufacturing of a wide range of aluminium products, with a direct employment of about 230.000 employees (and around 1 million indirect jobs).
This industry is characterised in EU by few facilities in the production of alumina and by a limited number of large global companies producing primary aluminium. Those firms are typically vertically integrated, as they also manufacture aluminium semi-finished products. In the downstream sector, hundreds of small vertically non-integrated firms are also involved.
On a global scale, roughly 60% of revenues and 66% of added value are generated by downstream segments of aluminium semis production, and the relative clout of these segments is even greater in EU countries considering that around half of the production capacity in terms of alumina refining and production of primary metal is found in EFTA countries (especially Norway and Iceland).
The EU primary production and the big deficit
With a production of primary aluminium which has strongly declined in recent years (-30 percent since 2008), the EU aluminium industrial value chain strongly depends on reliable and competitive foreign production of metal (purchases of unwrought aluminium are not less than 50% of total production costs for downstream transformers), as well as on the relations with the major end-user industries (automotive, transport, building, etc.).
The world location of the primary production of unwrought aluminium changed dramatically over the past 20 years, with an exponential growth in the clout of China (now representing about 57% of the total production), the marked retreat of North America and Europe and the new prominence of the Gulf States.
According to the more recent statistical data, the number of smelters in operation in the EU decreased by 38 % in the period 2002-2016, further increasing the market concentration at the European level. Changes in the institutional framework at global level have favored the geographical shifts of primary production of unwrought aluminium justified by the opportunity to benefit from lower costs in terms of energy, raw material processing, and transportation. Many big companies have thus made greenfield investments in new smelters, to cut production costs, to increase their output by leveraging captive, self-generated electric power and to expand their presence in the value-added products of the industrial value chain. Following this line, in the 2000-2017 period the EU lost over one fourth of its primary aluminium production, and the total production capacity dropped by the same percentage during the 2008-2016 period alone.
Such countries as Italy, the UK, the Netherlands, Poland and Hungary drastically reduced or ceased the production of primary metal and only 10 EU countries today have plants which produce aluminium in any form (ingots of pure metal and added value products such as slabs, billets, foundry alloys and wire rods). In 2017, Germany, France and Spain produced about 60% of the EU’s primary aluminium (with respect to 46% in 2008). In that year the production of primary metal in the EU, due to the disinvestment process on the part of large production companies and of the shutdowns of recent years, was about 27% of apparent consumption, and the installed production capacity was about 31% of the apparent consumption, therefore the recorded real productivity of the plants was about 88%.
In order to cover its needs the Union imports sizeable amounts of primary metal; Russia and Norway are the main exporting countries, Russia covering about 40% of the EU’s imports of unalloyed metal, while Norway has a market share of just under 50% in aluminium alloys. Other relevant countries exporting to the EU are Mozambique (17%) and Iceland (14%) for unalloyed aluminium and the United Arab Emirates and Iceland again for aluminium alloys.
The EU smelters are generally characterized by higher production costs than competitors located in other countries. CRU recently estimated that production weighted average site costs, that is costs necessary to transform raw materials into final products, are 9.7%/t higher in Europe than in the rest of the world (excluding China), being close to 1,700 euro per tonne. In 2017, about 80% of European smelters were beyond the median site cost, and the cost differentials are mainly explained by higher carbon and labor costs.
The EU secondary aluminium system
In 2017, the production of aluminium from scrap in the EU is estimated at about 3.2 million tons, lower than the pre-crisis levels (about 3.6 million tons in 2007).
It should be considered that in 2015, on a global scale, the secondary production of aluminium was estimated as equal to about 27 million tons. Germany and Italy are the two EU countries with the largest production share (slightly less than 50% of secondary aluminium in 2017). The trade balance of aluminium scraps and waste of the EU always showed a surplus in the 2002-2017 period and trade surplus actually grew during the past few years. The main destinations of EU exports are India and China.
The EU aluminium downstream value chain
Focusing on the main products of the first transformations of aluminium and its alloys (that is, extrusions, rolled products and foundry castings), the global production of these aluminium semis added up to almost 78 million tons in 2017, showing a 33% increase in the 2012-2017 period.
The increase in production volumes was basically the same in all three categories of semis being examined. In 2017, extrusions represented the best part of the global production of semis adding up to over 38%, followed by rolled products (just under 34%). Castings in any case recorded the largest growth, with production volumes which increased by 39% in the 2012-2017 period. Although it only grew by 18% in absolute terms in this period, the relative market share of the EU countries in the global production of semis decreased gradually from 29% in 2000 to 14% in 2017.
Germany, Italy and France are the main producers of aluminium semis in the EU, representing around 60% of the overall production in 2017. By looking at final uses, the consumption of the three main types of aluminium semis was driven mainly by China and the Middle East. Chinese consumption in 2017 was 15 times higher than in 2000, representing by now roughly 47% of the global demand. The share of consumption in the EU progressively decreased from 38% in 2000 to 15% in 2017.
Regarding the final uses, on a global context in 2017 semis produced by the downstream segments of the aluminium value chain were mainly used by the transportation (26%) and building and construction industries, followed by packaging (15%), electrical engineering (14%), machinery and equipment (9%) and durable consumer goods (5%). Regarding Europe, transportation is the main end user segment (42%), followed by constructions (23%) and packaging (17%); together, these three segments represent over 80% of all machined aluminium products consumed in Europe in 2017.
Some industrial policy reflections for EU aluminium
The EU competitive advantage in the aluminium value chain undoubtedly lies in the technological leadership of the downstream activities. However, the competitiveness of downstream transformers, especially SMEs, has progressively deteriorated. In 2017, the EU production of aluminium extrusions was below the levels of 2000, although global production has tripled in the same period. In aluminium rolling and aluminium casting industries, production has increased compared to 2000, but at a significantly slower pace than at the global level. As a result, the EU28’s share in global manufacturing of semi-finished aluminium products has constantly declined, from 29% in 2000 to 14% in 2017. In the period 2000-2017, the EU has constantly worsened its trade balance in all sectors. The geography of production has changed as a result of better performances registered by companies characterized by long-term relationships, based on geographical proximity, flexibility and customization, with end-user industries.
The deep changes in the economic, political and social systems on a global scale therefore demand a reconsideration, even at EU and national levels, of the form of this important industrial segment, the dynamics of the structure of final markets, such as transportation, building, construction, mechanics and packaging, should be monitored with the utmost attention, but it is also necessary to consider the concepts of circular economy and environmental sustainability which are extraordinarily coherent with the light metal in front of other materials used for industrial purposes. From this standpoint we consider, especially thinking about the reality in which we live, the importance of our experience as a leading country in the manufacturing and production domains and above all in the processing ad final uses of the light metal, that a commitment to redefine the issue of industrial policies from a complete value chain prospect, from the downstream activities to final uses and on to upstream activities is a priority, and we should therefore suggest new initiatives as regards trade and energy policies, for the sake of competitiveness and real innovation.
It is evident that the picture is very complex; an overall strategy is necessary as well as a starting point providing the certainty of the process to tackle and the objective datum of a practical and feasible solution.
We refer particularly to the long-standing issue of the competitive access to primary aluminium as a raw material; unfortunately for aluminium downstream enterprises in the EU, transformers and end users, the producers’ lobby prevailed over the development needs of the entire value chain, since the task of supporting the aluminium industry in the EU was mainly left in the past to trade policy, which, to the advantage of large multinational primary producer companies, remained fixed on the adoption of a system of tariffs for unwrought aluminium primarily justified by the opportunity to maintain the presence of this segment in the EU. As a matter of fact, although it is difficult to isolate the relative effects of different factors, the duty on imports of primary aluminium has contributed to outcomes that are far from those the European Commission was expecting on the one side, imposing the duty did not succeed in maintaining the presence of this segment of the aluminium industry in the EU since 2008, as previously highlighted, primary production of unwrought aluminium shrank by 30 percent, the number of smelters in operation in the EU decreased by 38 percent in the period 2002-2016, more than 11,300 job were lost in the period 2002-2015 in the upstream segment including alumina and metal supply. In addition, on the other side, the tariff has indeed generated additional costs on the downstream companies, especially SMEs higher production costs (resulting from the customs duty), together with the competition exerted both internally by vertically integrated European producers and externally by producers of third countries (in particular from China), has progressively deteriorated their competitiveness. An effective industrial policy for the aluminium industry must take into account all the aluminium value chain starting from the upstream activities to end-user industries, as well as the interactions between measures in different areas, such as energy, trade rules, research and innovation, raw materials access, environmental sustainability. The EU aluminium downstream industry has historically been an engine of creativity, job creation, growth and inclusiveness. While the innovative potential in the upstream segments is mostly related to energy efficiency improvements, the downstream companies may play a key role in strengthening the global position of many strategic value chains, such as automotive and aerospace, building and constructions, machinery and equipment, electrical engineering, and must be free from the weight of an anomalous cost as the EU tariff. In this perspective, the aluminium smelter closures in EU and the weight of import tariff on raw metal should be a strong wake up call for the European Commission, first of all Brussels should define new raw material access rules and do everything to save the aluminium downstream value chain, a strategic industry and a major driver for the EU’s economic strength and wealth. As shown in the continuous monitoring studies committed by FACE and conducted by the LUISS University of Rome on the EU aluminium downstream competitivity, the first step should be the abolition of the customs duty of unwrought metal, as it artificially raises downstream costs of more than 1 billion euros per year, without offering any appreciable result in defending the upstream production.