To counter Chinese ambitions, McGroarty calls for policy makers to consider restoring a strategic aluminum stockpile to keep our remaining handful of smelters from shutting down — because “[when the COVID-induced recession gives way to national economic recovery, we’ll need an American aluminum industry – not only for the metal it makes, but for the jobs and GDP it generates as well.”
Don’t Let COVID-19 Kill American Industry: Bring Back the Aluminum Strategic Stockpile
Don’t Let COVID-19 Kill American Industry: Bring Back the Aluminum Strategic Stockpile
by Daniel McGroarty
RealClearDefense, March 31, 2020
Coronavirus kills more than just people. While the world is reeling from the health impact, our "force quit" shutdown of the U.S. economy threatens the longer-term prospects of entire industries. But hard as it is to believe right now, the COVID-19 pandemic will one day recede. The question is whether United States' inaction will let this public health crisis spiral into a strategic resource crisis as well, allowing China to grab global market share. The crucial aluminum sector is a case in point.
Aluminum is economically ubiquitous, from cans, cars and consumer durables, to airplanes and building construction. While the U.S. and other Western nations suffer a swift deceleration in all sectors, China – first to be struck by the virus and first to recover –is revving up its dormant economy, unconstrained by free-market laws of supply and demand. According to Reuters, while “Aluminum prices in China are at the lowest since 2016 and many mills are believed to be in deficit,” Chinese aluminum production is considerably higher for January and February, as smelters “run flat out,” fattening surpluses on the Shanghai Futures Exchange and sinking aluminum prices.
Even day-to-day shifts in Chinese production prove the point. Recent announcements suggest China will take more than 300,000 tons of smelting capacity out of production. Sounds like a large number until you consider that it's less than 1% of China's aluminum capacity of 36 million tons. The London Metal Exchange shrugged off the news, and aluminum slumped further.
Classical economics teaches us markets are inherently self-correcting, and that China will only hurt itself if it continues full-out production.
A prediction: China will take that pain because it has its eyes on the geopolitical prize. If post-pandemic China wants to put people back to work, juice its economy – and, just maybe, drive U.S. and other competitors out of the aluminum sector entirely – it will maintain full production, regardless of the price impact. COVID has not erased the “great game” for global economic dominance – to the contrary, it has accelerated it. A new report from strategic consultancy Horizon Advisory suggests that leveraging China’s COVID recovery is government policy, quoting a statement made by a director with China’s Ministry of Civil Affairs just days after China “flattened its curve”: "It is possible to turn the crisis into an opportunity - to increase the trust and the dependence of all countries around the world of 'Made in China.’”
In response, U.S. policymakers must go back to the future, studying the lessons of the last superpower conflict, when the strategic value of metals and minerals – and the dangers of foreign dominance – were well understood. From World War II through the Cold War, our government kept aluminum reserves in the National Defense Stockpile. But that ended with the implosion of the Soviet Union; we sold off the stockpile, and global supply chains took hold. By the turn of this century, the U.S. became a net importer of aluminum, along with scores of other metals and minerals once deemed strategic.
The stockpile may be gone, but aluminum remains critical to "the national economy and national security," in the words of the U.S. Geological Survey. The Survey added aluminum to its Critical Minerals List of 35 minerals and metals in 2018, and it's one of only nine "criticals” essential to all industrial sectors, including defense. And on the subject of defense, open-source Pentagon reports list aluminum as the number one defense material by volume, while an unclassified defense study cites a shortage of aluminum as “hav[ing] already caused some kind of significant weapon system production delay for DoD.”
For all its strategic importance, American aluminum has been left to weather harsh market forces on its own. After reaching two million metric tons per year as recently as a decade ago, U.S. aluminum production fell 60% in 2015. With the sector shrinking from 13 smelters in 2013 to just 5 smelters today, production in 2019 was 1.1 million tons, barely half the former amount. Now comes the COVID-19 gut-punch, and a roller-coaster plunge into recession.
It’s harsh but true: America’s crisis is China’s opportunity. There’s a cruel asymmetry here. China’s state-owned enterprises can incur deficits without consequence, as the government plays the long game for market dominance. Without U.S. Government backing and at the mercy of Chinese market-flooding, U.S. aluminum producers could well be driven into bankruptcy and out of business.
The United States has allies in its effort to keep the aluminum industry alive. Canada, recognized by statute as part of the U.S. Defense Industrial Base, has been integrated into our supply chain since the eve of World War II. And now that U.S. law has expanded the National Technology Industrial Base to include Australia – which hosts four aluminum smelters, down from six in the last decade – any policy adopted by the U.S. should recognize this “aluminum alliance” as a national security asset. We have an opportunity to coordinate aluminum stockpile purchases, or even maintain an allied aluminum stockpile.
As the pandemic spreads, U.S. policymakers are discussing direct cash payments to every woman, man and child, and low- or no-interest loans to keep small businesses alive. In the same spirit, the President and Congress should consider restoring a strategic aluminum stockpile to keep our remaining handful of smelters from shutting down. When the COVID-induced recession gives way to national economic recovery, we’ll need an American aluminum industry – not only for the metal it makes but for the jobs and GDP it generates as well.