When a 127-Year-Old U.S. Industry Collapses Under China's Weight

Alcoa Inc.’s latest aluminum-making cutback is signaling the end of the iconic American industry.

For 127 years, the New York-based company has been churning out the lightweight metal used in everything from beverage cans to airplanes, once making it a symbol of U.S. industrial might. Now, with prices languishing near six-year lows, it’s wiping out almost a third of domestic operating capacity, Harbor Intelligence estimates. If prices don’t recover, the researcher predicts almost all U.S. smelting plants will close by next year.

While that’s a big deal for the U.S. industry and the people it employs, it doesn’t mean much for global supplies. Alcoa’s decision to eliminate 503,000 metric tons of smelting capacity accounts for about 31 percent of the U.S. total for primary aluminum, but less than one percent of the global total, according to Harbor. For more than a decade, output has been moving to where it’s cheaper to produce: Russia, the Middle East and China. A global glut has driven prices down by 27 percent in the past year, rendering American operations unprofitable and accelerating the pace of the industry’s demise.

“You’ve seen a fair clip of closures in the U.S., that is just unfortunate, but a development that’s very difficult to change,” Michael Widmer, head of metal markets research at Bank of America Corp. in London, said in a telephone interview. “It means you’ll just have to purchase from somewhere else.”

That’s exactly what Jay Armstrong, the president of Trialco Inc. in Chicago Heights, Illinois, is doing. The company, which turns aluminum into finished manufactured products, now buys about 80 percent of the supplies it turns into car wheels from overseas. That’s up from 40 percent five years ago, he said.

“It’s not the kind of business where we’re going to pay more and buy all American,” Armstrong said in a telephone interview. “It’s too competitive a business to do that.”

Overseas Advantage

Aluminum is down 19 percent this year to $1,501 a ton on the London Metal Exchange. The metal touched $1,460 last week, the lowest since 2009, and most American smelters can’t make money when prices are near $1,500 or below, Austin, Texas-based Harbor estimates. Plants overseas usually have the advantage of lower labor costs, cheaper energy expenses and weaker domestic currencies that favor exports to the U.S.

While output has been moving abroad for some time, the game changer in the past year has been the domination of China, where ballooning output has compounded a global surplus and driven prices so low that Bank of America estimates more than 50 percent of producers globally lose money. Smelters in the Asian country are still profitable, helped by higher physical premiums in the region.

China probably will account for 55 percent of global aluminum production this year, up from 24 percent in 2005, according to Harbor research. The U.S. has gone in the opposite direction: from 2.5 million tons in 2005 to 1.6 million in 2015, it said.

Still, not all U.S. smelters will benefit from closing down. Citigroup Inc. says some domestic operations with long-term energy contracts will have to pay regardless and are better off making the metal than simply paying the energy bill. Some plants also have access to cheap hydro power, said David Wilson, an analyst at Citigroup in London.

“You have to be losing a lot of money to make it worth while to effectively shut down,” Wilson said in a telephone interview.

Energy contracts haven’t been an impediment for Alcoa. When Monday’s plans are undertaken, it will have closed, divested or curtailed 45 percent of smelting capacity since 2007.