October 27, 2015 PRODUCTION, POLITICS AND POLICIES OF GLOBAL ALUMINUM China International Aluminum Industry Week 2015 Heidi Brock President and CEO The Aluminum Association
NORTH AMERICAN DEMAND STRONG 28.0 27.1 U.S./Canadian Aluminum Demand (Billions of Pounds) 26.0 24.0 22.0 25.8 23.1 21.3 23.0 24.2 24.6 25.5 Demand up 3.6% Y/Y in 2014 Approaching Mid-2000s record levels YTD 2015 - Demand up 2.4% 20.0 18.0 18.7 Apparent Consumption up 7% YTD 16.0 2006 2007 2008 2009 2010 2011 2012 2013 2014p Source: The Aluminum Association 2
GROWTH IN AUTO EXPANDING DOORS & BODY-IN- WHITE 600 500+ lbs. Pounds Per Vehicle (PPV) 500 HOODS Blocks 400 394 lbs. Bumpers 300 Heads Wheels 200 Sheet Extrusions Heat Exchangers 100 0 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 Source: Ducker 3
CHINESE IMPORTS TO U.S. ON THE RISE 1,000 U.S. Imports of Chinese Semifabricated Product (Million Lbs) Extrusions Sheet & Plate Foil All Other +63% 900 800 700 600 500 400 300 200 100 0 2009 2010 2011 2012 2013 2014 2015 YTD Source: U.S. Census Bureau 4
THE NEED TO HONOR GLOBAL TRADE RULES 5
AL EMISSIONS CHINA Source: CRU 6
FOUNDATION FOR COMMON GROUND 7
Production, Politics and Policies of Global Aluminum China Aluminum Week October 27, 2015 Introduction Good morning, everyone. Thank you for the kind introduction. I am Heidi Brock, President & CEO of the Aluminum Association based in Washington, D.C. Our organization is the aluminum industry s leading voice in Washington, D.C., as we advocate for a strong and vibrant North American aluminum industry. It is an honor to be with you today. And, let me again thank my colleagues at the China Non- Ferrous Metals Industry Association for extending this invitation and their gracious and impressive hospitality. This is an important gathering at an important time for our global aluminum industry. We are on the cusp of tremendous growth. Yet, we are also on the cusp of missing the full opportunity in front of us. Missing it if we do not address the challenges facing our industry and addressing them with a sense of urgency. This conference is an important one. The voices of the China Non-Ferrous Metals Industry Association and its member companies are strong and important. Strong voices with the government, and with the global aluminum industry. These voices can make a difference in our shared future. The opportunity: Demand is Strong Despite some of the challenges we face which I will address in a minute much of the aluminum industry story today is quite encouraging. Like many industries, particularly in manufacturing, we saw a significant drop off in demand following the Great Recession of 2008 and 2009. Since that time, we have seen steady growth and, today, our demand profile is back on the rise in a big way. This slide shows that (slide page 2) And this slide also demonstrates strong demand from another perspective. Last year, domestic aluminum producers shipped 25.5 billion pounds of metal (this is an equivalent to 11.6 million metric tonness) in the U.S. and Canada for the first time since the mid-2000s. That represents more than 35 percent growth in shipment volumes compared to the trough of the recession in 2009. Demand today is approaching the record levels we haven t seen since the mid-2000s. Much of this industry growth is buoyed by the increasing use of aluminum in the automotive and transportation sector. In fact, use of aluminum in transportation has nearly doubled since 2009. And this slide (Slide page 3) demonstrates why we are so optimistic. The aluminum industry has had 50 years of uninterrupted growth in the automotive sector. And, according to a survey of automakers by third-party global research firm Ducker Worldwide, total use of aluminum in the average North American vehicle will grow from less than 400 pounds (0.20 tonnes) today to more than 500 pounds (0.25 tonnes) in 2025. We ve already seen this growth reflected in the advent of the aluminum-intensive Ford F-150 pickup truck released last year. 1
The 2015 version of the best-selling vehicle in the U.S. shaved 700 pounds (0.35 tonnes) of weight off the previous model improving safety, increasing performance and driving fuel economy gains. So, now you are all in a better position to understand why we are so optimistic. Challenges Ahead Now let me turn to our challenges. 1. Transparency 2. International Trade 3. The environment While the picture is bright for North American aluminum demand, there are significant challenges facing the global industry. These challenges must be addressed in order for the aluminum industry to continue to grow and be a sustainable contributor to the global economy. Our challenges are transparency, consistent use of trade rules, and the impact of aluminum production on our environment. Challenges Ahead: #1 Transparency Let me focus first on transparency. Transparency is needed in two major areas market transparency and environmental impact transparency. As you know, years of state-supported growth, not aligned government policies and the slowing Chinese economy have led to a global oversupply of Chinese-produced aluminum. Over the past ten years, Chinese aluminum production has grown at a rate unprecedented in global economic history. As China s infrastructure and building boom absorbed millions of tonnes of metal, a globally significant number of Chinese smelters came online to meet the demand. What s more, Chinese government incentives, subsidies and planning led to smelters being built even when doing so made little environmental or market sense. The result is that China s smelters produce around half of the world s aluminum supply today compared to just 11 percent of supply in the year 2000. I am sure you can understand our concern for the U.S. during this same period, as the number of aluminum smelters in the United States has declined from 14 in 2005 to 8 today. Just as important as the number of smelters, the issues are the lack of transparency in the market, the questionable trading practices, and resulting carbon emissions from these smelters all of these factors are putting our global aluminum sustainability story at risk. Challenges Ahead: #2 Trade So, let me address the second challenge for our industry which relates to our international trading relationships. As you can see on this slide, (slide page 4) in the United States we have seen a dramatic increase in aluminum imports from China. Between 2012 and 2014, imports of Chinese semi-fabricated aluminum into the U.S. grew 115 percent; this year, imports are up 63 percent year-to-date. 2
And, there is also mounting evidence that certain players in the Chinese aluminum industry are misusing and perhaps even circumventing trade rules, further distorting the market. As this slide (slide page 5) shows, these firms are shipping minimally worked aluminum into the United States or through third-party countries in the form of partially semi-fabricated products. These products differ from genuine semi-fabricated products as they are then re-melted for use as primary aluminum. These companies derive 3 benefits: 1.) They avoid the 15 percent Chinese export tax on primary aluminum, 2.) They receive a 13 percent VAT rebate on the metal, and 3.) They avoid U.S. anti-dumping duty margins on imports into the U.S. And these 3 advantages to the Chinese aluminum sector lead to 3 disturbing consequences that should concern everybody in this room: 1.) Actions like these violate international trade rules, 2.) They create an un-level playing field for U.S. aluminum producers, and 3.) They lead to distortions in the global marketplace that have ripple effects across the entire industry. This trading behavior is not the behavior of a market economy. This behavior is entirely inconsistent with the values adopted and communicated by the Chinese government. More specifically, values that include sustainable growth and a sustainable environment. We respectfully appeal to the Chinese government to address these policies and practices which allow only a few to benefit at the expense of so many. This behavior deserves greater transparency as it is highly disruptive to the reputation of the entire aluminum industry and its global market. Challenges Ahead: #3 Environment Now let me turn to the 3 rd challenge we face and that is with the environment (Slide 6) -- Aluminum production in China is the most carbon intensive in the world. The carbon footprint of one ton of Chinese aluminum is 15.5 metric tons of CO2. Emissions from Chinese smelters are almost three times the total emissions of North American and European smelters. Only ten years ago China supplied 24% of the world s aluminum. Today, Chinese manufacturers have more than doubled their output and supply 52% of all primary aluminum produced globally. At the same time this massive increase in production carries a significant environmental consequence, and significant responsibility, because of the reliance of Chinese smelters including the newest of those smelters on carbon-intensive coal to generate their electric power. It is noteworthy that China has made significant commitments to fight the effects of climate change. But these promises require action and require verification. These promises need more specifics, more accountability, and more speed. In 2009, China announced that by 2020 five years from now carbon dioxide emissions will be 40-45% lower than 2005 levels per unit of GDP. 3
Through a series of national energy conservation and emission reduction plans, China has accelerated industry transformation to meet these goals. But, much more remains to be done. Nearly a year ago, President Obama and President Xi reinforced the urgency of addressing climate change when they jointly announced more ambitious national targets for the reduction of CO 2 emissions. The U.S. announced it would double the pace of carbon pollution reduction. As part of President Xi s leadership in calling for an energy revolution, he set a clear goal for China to peak in CO 2 emissions before 2030. Most recently, the Director General of the Department of Climate Change in the NDRC filed China s Intended Nationally Determined Contribution or INDC to the UNFC CC (United Nations Framework Convention on Climate Change) outlining China s commitments. We note with interest China s pledge to reduce carbon dioxide emissions by 60-65% from 2005 levels in key sectors including nonferrous metals. A pledge to quote strictly control the total expansion of industries with extensive energy consumption and emissions and accelerating the elimination of outdated production capacity. end quote. And just last month, President Obama and President Xi announced concrete and achievable goals for addressing climate change that build on these earlier pledges and set a time frame that emphasizes the immediacy of these challenges. These commitments demonstrate an understanding that aluminum production in China must change for China to meet its national energy and emissions targets. These commitments represent an understanding that real action must occur or we risk our global aluminum industry reputation. A reputation that today is of an industry that produces modern, innovative and environmentally friendly products. This is the reputation we all need in order to capture the full growth potential ahead of us. Regrettably, China s government policies that permit or even encourage the perpetuation and expansion of high-carbon production do not benefit the global aluminum industry. They undercut the efforts that both of our Associations undertake to position aluminum as the sustainable material of choice for the 21 st Century. As sustainability concerns take center stage in North America, in China, and for the rest of the world, high-emission production hampers our collective ability to compete with other metals. Those competing materials have advocates who are eager to persuade customers that aluminum should be passed over because of its carbon footprint. Having our governments say they support reducing carbon emissions is not enough. In this case, action is required. Action will make a difference. And these actions will only be recognized with verification. Without action and without verification our long term global growth could be severely compromised. And now, despite the challenges of transparency, trade and the environment, I must emphasize we share common goals. 4
We have a lot in Common Our countries share common goals of achieving energy efficiencies and improving quality of life. Modern economies are low-carbon economies and aluminum as a product offers a wide array of industrial and consumer solutions to get us there. Aluminum intensive cars and airplanes are lighter and stronger, enabling them to gain performance by using less fuel aluminum enables greener buildings and aluminum reduces waste through the ability to infinitely recycle the metal. The North American and Chinese aluminum industries have a track record for achieving our goals through cooperation. In fact, this slide (slide page 7) shows a copy of the Memorandum of Understanding that was signed 11 years ago in 2004 between our respective organizations the U.S. based Aluminum Association and the China Nonferrous Metals Industry Association. The leadership of both of our organizations committed to developing projects to support and improve the aluminum industry in our respective countries. The vision in 2004 was to pursue common projects in the area of statistics, health & safety, standards, the environment, and recycling. Since that time we held a successful conference in Beijing working with our respective governments to reduce PFC\s. We have also had bi-lateral conversations to share safety best practices. And, while there have not been structured joint projects in the past several years, now is a good the time to recommit our respective organizations to this agreement. Now is the time to work together to achieve global energy efficiency and emission reduction goals. Achieving emission reductions and energy efficiencies while eliminating carbon-intensive production is healthy for our communities and will lead to a more sustainable industry. North American producers have achieved GHG-reduction targets by increasing their use of hydroelectricity, developing and sharing emissions best practices, and increasing energy efficiency. The 21st Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (COP21) represents a historic opportunity for our associations to encourage our governments to set ambitious, evidence-based commitments to combat climate change. We note with encouragement that the Chinese government recently filed its national plan committing to deeper cuts to carbon dioxide emissions, to build a low-carbon energy system, and to accelerate the elimination of outdated production capacity. We would urge the Chinese government to make concrete commitments to address the problems of both overproduction and emissions from their domestic primary aluminum production so that it can meet its national climate change targets In addition, we recommend that a sustainable industrial production policy for aluminum in China should set an objective limit and reduce the Scope 1 and Scope 2 CO2 emissions by its 5
primary aluminum production. China should also commit to setting appropriate standards for overall aluminum production emissions, taking offline production assets that do not meet those standards. These commitments represent a critical opportunity for China to advance energy efficiency and emissions reductions targets in support of global commitments to address climate change. Furthermore, we strongly believe that international verification and clear reporting of emissions reductions by all parties to the UNFCC (United Nations Framework on Climate Change), must be incorporated into any future agreement. The Aluminum Association and CNIA members have some of the finest minds in the global aluminum industry. These industry leaders are leaders in research, data analysis and advocacy. And, they are leaders in improving the environmental footprint of the aluminum industry. We have much to offer our respective governments. Conclusion The United States and China respectively the world s largest developed and developing nations, the two largest energy consumers, and the two largest producers of greenhouse gases must become more active partners in developing low-carbon economies. I am confident that American and Chinese aluminum industries can work together to promote best practices in sustainable manufacturing and environmental stewardship. As we work together on Chinese Government policies to: Improve market and environmental transparency, Address carbon emissions and rebalance industry, and Protect domestic supply of critical resources. These policies must be respected and not circumvented. The future for aluminum is bright. Together, we can work with our governments and achieve reforms in the industry to assure its long-term, sustainable growth. Long-term growth that allows both of our countries and our people to grow and prosper. Growth that produces aluminum products which help us address global environmental challenges. Because by working together we can make aluminum products that transform good products into great products. And, make the global aluminum industry even greater. ### 6