Tuesday, April 22, 2014

The Financial Impact of the China Trade Case 

Nearly five years ago the industry came together under the leadership of the Aluminum Extruders Council to develop a strategic plan for the industry.  This plan was designed to expand the extrusion market in North America.  It contained defensive and offensive elements. The defense strategy took aim at protecting our market from illegal and unfair trade practices causing an explosion of imports into the U.S. market in 2009. Our offense strategy developed industry promotion actions intended to expand and promote the use of aluminum extrusions.  As these strategies were executed, the United States economy began its slow yet steady rally from the depths of the Great Recession.  I’d like to illustrate how those elements worked together to deliver over one billion more pounds in aluminum extrusion shipments in 2013 compared to 2009. This 32 percent increase in volume has led to extruders investing more than $700 million in the last two years.  In short, our industry has experienced its greatest impact from the China Fair Trade Initiative compared to innovation or economic recovery.  This analysis will show how approximately 700 million pounds of the over one billion pounds of growth we enjoyed in 2013 came from the Fair Trade Committee’s work.

According to the Aluminum Association, Apparent Demand Shipments 
totaled  3.3 BN lbs in 2009 and 4.4 BN lbs in 2013. During the same period, 
domestic producers increased shipments from 2.9 BN lbs to 4.2 BN.
 The key element of the AEC’s strategic plan was the China trade case.  Without a successful petition to the U.S. government the U.S. industry was threatened with nearly 1,000 Chinese presses feasting on our market with prices at or below domestic production costs.  Defending our market was a prerequisite to innovation and expansion.  Without protection, all of our growth could have flowed to the Chinese.

The data is quite clear on the impacts of imports to the U.S. market. Imports fell from their high of 488 million pounds in 2010 to nearly half that level in 2013.  While this nets out 200 million pounds, it is more impressive to see the drop as a percentage of our overall market.  Imports took 14.9% of our market in 2009 and fell to only 5.8% in 2013.  Also noteworthy, imports reached a U.S. market share of 21% in December 2009 and fell to 5.4% in December 2010.  The final preliminary ruling took effect in October of 2010 and literally stopped Chinese imports in their tracks.  While the historic data tells us that 200 million of the one billion pounds realized in 2013 vs. 2009 was straight from the loss in Chinese imports, it must be recognized that the run rate for Chinese extrusions was picking up steam when it hit 21% of the U.S. market before the industry filed its petition in early 2010.  Most industry experts agree that the rapid growth in imports from China would have continued to capture market share, further crippling our industry.

From July 1, 2009 to July 31, 2010 imports totaled nearly 700 million pounds, which is an average monthly run rate of almost 54 million pounds.  Given that in 2013 the market itself grew 16% higher than an annualized rate of the July 1, 2009 to July 31, 2010 time period, Chinese extrusions could have taken nearly 650-750 million pounds of the 1.05 billion pounds of growth we saw in 2013.  This assumes Chinese imports ONLY grew at the same rate the market grew.

According to the Aluminum Association & other import documentation, imports from China 
peaked at 19% market share in 2009.  However, imports came to a stop once duties 
were imposed in October 2010.  Since then, imports from China have been negligible.
Reports from the industry identified building and construction as the market most devastated from the run up in Chinese imports.  The data gets cloudier on this as the U.S. was in the midst of a deep recession in the housing market resulting from the collapse in housing starts beginning in Q3 2006.  Even still, it is estimated by the Aluminum Association Statistical Committee that approximately 50 percent of all Chinese extrusion were aimed at B&C applications, including storefront, curtain wall, windows and doors, lanai covers, shutter blade, fencing, and a variety of miscellaneous categories.  Manufacturers of these products were hungry for price reductions in a hotly competitive market suffering from the housing crisis.  As one manufacturer changed supply from a domestic mill to a Chinese extruder, others were forced to follow suit.

A myriad of consumer and industrial applications were targeted by the Chinese.  Anodize and fabricated extrusions were easy targets for the Chinese.  As more orders poured into our country, it became easier for custom service offerings using domestic warehouses to deliver JIT programs.  With low prices, special delivery systems, and adequate quality, the growth in Chinese extrusions had no barrier.  It is estimated approximately 35 percent of all Chinese extrusions were intended for industrial and consumer applications.  
The remaining 15 percent of Chinese extrusions landed in applications using standard shapes and transportation end uses.  Chinese penetration in these areas was limited due to the quality and delivery concerns of machine-grade and structural applications.  The Chinese had not perfected their production lines for end uses such as rod and bar, trailer, automotive, and other segments requiring specific mechanical requirements.  Most experts believe that the Chinese would have developed their processes in time and become quite capable of dumping extrusions into these areas as well.

Meanwhile, the AEC strategic plan recognized great developmental opportunities for our industry in emerging markets such as automotive, commercial building & construction, and renewable energy.  Such development would, and will, take time with a strong industry voice to communicate the virtues of aluminum extrusions.  The effort began with a modest budget and high ambitions.  Since 2010, the AEC has invested over $500,000 in education, advertising, trade shows, and a variety of other efforts aimed at educating specifiers, architects, designers, engineers, academia, and other influencers that drive material choices in manufacturing.

It is always hard to determine the extent of such an effort’s impact, but the record clearly shows solid improvement in renewable energy sales, automotive applications, and a sustained position in commercial building and construction in which aluminum has always dominated.  
Since 2010, estimated extrusion shipments to the renewable sector have grown from approximately 25 million pounds to an estimated 100 million pounds in 2013.  Newly launched automotive platforms boast of increased usage of aluminum extrusions.  Ford and Tesla are two OEM’s that have been quite open about aluminum content in their new models.  Anecdotal information from the extrusion industry creates strong evidence that Ducker’s prediction that aluminum extrusion content is set to double in the next ten years from its current 25 pounds per vehicle level is on target.   This is critical to our industry’s future.  Those new automotive platforms are replacing older platforms that drove consumption of aluminum extrusions to an average consumption level of 225-300 million pounds per year over the last decade.  If extrusions had not become the product of choice in these future platforms in the coming years, we would have been witness to one of the greatest drops in demand in any sector since residential windows and doors.

While the market is poised to see dramatic increases in demand in both the energy and automotive sectors, and a sustainable position in commercial B&C, none of this could have happened without the market protection created by the Fair Trade Initiative.  It seems obvious that much of this growth would have gone to the Chinese.  Nevertheless, the full impacts of this growth realized to date is modest.  Automotive growth in 2013 from innovation may have only delivered 25 million additional pounds.  Combined with the renewable energy increase, we can only conservatively account for 100-120 million pounds in volume out of the 1.05 billion additional pounds in 2013.

By triangulating the data it would appear only approximately 230-330 million of the additional pounds in 2013 versus 2009 can be attributed to economic growth.  With housing starts still languishing at less than 50 percent of their peak in 2006, real unemployment chronically high, and other key macroeconomic indicators well below an acceptable level, it is not hard to conclude that our anemic recovery since the depths of the Great Recession has not lifted our industry as much as we’ve seen from previous post-recession expansions.  If this is true, then it’s clear that the most important work our industry has been doing is in the trade arena.

Using an annualized rate based on imports from 7/1/09 to 7/31/10, 
estimated innovation impacts since 2010, and crediting remaining 
difference as economic stimulation, it's clear trade was our greatest win.
With over 70 percent of the 2013 vs. 2009 volume attributable to the China trade case, each extruder, supplier, and producer should look at their U.S. volumes during that time.  Seventy percent of whatever growth you have experienced since 2009 is attributable to the actions taken by the AEC to defend our market against the illegal and unfair trade practices by the aluminum extrusion industry of the People’s Republic of China.  We’ve long used a contribution margin of $.25 per pound to translate volume to margin.  So, using that yardstick we can say that the financial impact to our industry has been approximately $180 million in 2013 alone.  With that in mind, and the huge expansion opportunities we see for our industry in emerging markets and applications, the $700 million in capital expenditures invested in the U.S. over the last two years makes sense.

So, is it worth it to the industry to continue to raise $1 – 2 million a year to protect this market, its future, and its investment?  The answer is clearly, “YES”.  If an extruder shipped only four million pounds more in 2013 versus 2009, then $700,000 in margin is directly attributable to the Chinese trade case. 

Isn’t it obvious that a donation makes sense to protect that gain?  Don’t let your future and your business be based on hoping someone else will pay the legal bills.  Make that donation today so you can take full advantage of the growth we will realize in the coming years.