Summary of the case study on the German aluminium downstream promoted by FACE and carried out by FAIReconomics magazine together with Prof. Ingo Rollwagen
In November 2020, German magazine FAIReconomics, with the collaboration of Prof. Ingo Rollwagen from Hochschule Fresenius University, revealed their new study: “Between Covid-19 after-effects and the European Green Deal: Challenges for small and medium-sized aluminium processing companies in Germany”. The study, commissioned by FACE (the “Federation of Aluminium Consumers in Europe”), draws a clear portrait of the German SMEs’ struggles amidst political uncertainty and Covid-19 pandemic. In total, 580 companies from the downstream sector (including trade, building activity, lightweight construction, car manufacturing, and suppliers) were surveyed; the vast majority employing more than 200 employees. Interviews were carried out in May and June 2020, at a time when Germany pushed its entire economy in lockdown.
Despite the peculiarity of the context in which the study took place, the results of the policy paper are unequivocal: German companies are facing their strongest challenge since the financial crisis of 2008, and the entire aluminium industry altogether has significant competitiveness problems.
Among their several findings and recommendations, the study stresses in particular the elimination of the EU import duty on raw material as an express and fair relief measure to support all the companies. And the idea has merits, as the study shows that German SMEs could save up to €100 million and act as an important, direly needed, economic stimulus.
The German Aluminium industry
Overall, Germany is considered as one of the largest aluminium markets in the world. It is among the top five countries with the highest demand for aluminium, copper and zinc. In terms of primary aluminium consumption, Germany holds the third place worldwide behind China and the USA with a share of 3.6 percent. In the EU, Germany was the largest consumer of primary aluminium with 2.1 million tonnes.
Regarding the geographical distribution of EU production, Germany (18%), France (17%), and Spain (17%) are the three countries with the largest share of production. In 2017, they produced about 60% of all primary aluminium in the EU (46% in 2008). However, these three countries combined only accounts for 2% of the global primary aluminium production. Germany is a net importer of raw aluminium, as it lacks natural resources and because the EU production alone is insufficient to fulfil the country’s appetite for raw materials.
In Germany, the aluminium industry directly employed 65,000 people in 2019. The same year, the aluminium industry generated a turnover of €21 billion (€17 billion in 2005). More than two-thirds of this turnover was generated by raw aluminium and semi-finished aluminium product producers. Foreign exports contribute significantly to the German aluminium, accounting for more than 40% of sales.
Rolling, extrusion and casting account for about 90% of the German production of semi-finished aluminium products. The three main areas of application for aluminium are: 1) the automotive construction sector (48%); 2) the construction industry (15 %); 3) the packaging industry (10%). (1)
Recycling activities are widespread in Germany, even though Germany and the EU still export massively aluminium scrap. It is estimated that secondary aluminium (i.e. recycled metal) makes up about 59% of the total feedstock used in Germany (and 41% for copper and 44% of crude steel).
Germany has among the highest aluminium recycling rates in the world: over 80%. And this figure spikes up even more if we consider the recycling rate of beverage cans alone: 96%. However, despite being one of the largest markets in the world for aluminium, Germany has seen some decline in its primary production over the last years.
This trend is not confined to German alone, as the global EU primary production has shrunk by 30% since 2008. In addition, some primary aluminium producing countries such as Italy (Alcoa smelting plants in Fusina and Portovesme, 2013-2014), the UK (Rio Tinto Lynemouth smelting plant in Northumberland, 2012) and the Netherlands (Klesch smelting plant in Vlissingen, 2011) have largely restricted or stopped production in recent years due to rising energy costs and strict environmental regulations as well as falling aluminium prices and lower demand from major customers, especially from the automotive and construction sectors.
The European Green Deal: great idea, bad timing
When the European Green Deal was officially presented on December 11, 2019, no one could foresee the economic crisis that followed only weeks later, taking the shape of an international pandemic. In essence, the European Green Deal aims to eliminate net greenhouse gas emissions by 2050 and to decouple economic growth from natural resources. These ambitious goals are meant to be achieved by 2050, and all companies accross Europe must change profoundly their business model and environmental performances accordingly.
However, aluminium producing and processing companies were already living with the disadvantages of high European environmental standards. And the fear that intra-European CO2 pricing could cause energy-intensive companies in the non-ferrous industry to relocate to Brazil or China (i.e. to countries where environmental regulations are more liberal and less stringent) has become more vivid than ever. In Germany and Europe, well-paid industrial jobs have been already lost to this phenomenon.
With the many shortcomings of the regulatory environment, high energy costs, the further shaping of the European Green Deal which inherently implies a twin transition (digital and green) and the switch to a circular business model, many SMEs made poor figures in May 2020 – which can also be explained greatly by the economic distortions induced by COVID-19. Due to the pandemic, many companies in the aluminium processing industry are working with heavy restrictions: lockdown, faltering supply chain, deep economic recession…
Although the Green Deal has been praised positively across Europe and abroad, it remains a source of challenge to SMEs which were already struggling with fierce international competition, economic distortion due to import tariffs, delocalization, CO2 pricing and other EU environmental regulations. And Covid-19 has now added another layer to their problems.
But interestingly enough, aluminium is considered a key raw material in the forthcoming Green Deal, as its material properties will support:
● a massive wave of the renovation of buildings and infrastructure;
● the further development of recycling management due to its high recyclability through the new development of design-based product innovations
● the introduction of renewable energy projects (especially wind, solar and hydrogen)
● the transformation of transport and logistics (e.g. electric vehicles, rail transport – lightweight construction).
Altogether, aluminium is a metal that is vital for the EU Green Deal, and neither the EU nor the Member States have interest in losing their domestic production.
The importance of aluminium has grown steadily in recent years, and is likely to grow evermore as the world population increases along with worldwide demand and economic prosperity. According to OECD’s projections , the demand for metallic and non-metallic raw materials should double by 2060. Aluminium has unique properties that makes it “one-of-a-kind” material. It has low density and an interesting panel of characteristics: it is light, flexible, strong, resilient, conductible and corrosion resistant. Furthermore, it is easily and indefinitely recyclable under the right conditions. About 75% of all aluminium ever produced in the world is recycled and used through a circular economy loop frame. Recycling aluminium requires also little energy: only 5% of the total energy required under normal circumstances for primary production. It is not a coincidence if the EU has set the goal of achieving a 100% aluminium circularity by 2030, as it recognises the importance of aluminium in the circular economy and as a “green” raw material. Besides, a shortage of aluminium is not be feared as 8% of the earth’s surface contains aluminium, making it one of the most widely available raw materials after silicon and oxygen. Thanks to its properties (strength, conductivity, indefinite and easy recyclability), aluminium offers plenty of possibilities to engineers and designers to create sustainable and ecological-friendly products (e.g. lighter vehicle, photovoltaic system, heating and cooling products, hydrogen-based technology…). However, aluminium production is very energy-intensive! It consumes about twice as much energy as steel production. But, unlike steel production, aluminium producers have the possibility of turning their energy consumption towards renewable sources (i.e. electricity); making then aluminium a viable alternative for a low-carbon economy, as it cuts massively carbon emission at its sources during the early stages of the metal extraction and production.
Study’s main findings: what are the numbers?
Covid-19 has hit the German and European economy very hard and led to a recession stronger than the financial crisis of 2009 et seq. With the shutdown in March and April, economic output was drastically reduced. But the easing of restrictions allowed economic activities to resume slowly in May, although uncertainty remains: Citizens and businesses will still have to adapt their behavior as long as a long-term solution hasn’t been found to the pandemic.
According to the FAIReconomics study, 84% aluminium processing companies consider their economic situation as “very bad” and “poor”, and they fear the second wave of the pandemic may exacerbate existing economic distortions.
In addition, the commercial banks providing loans to ailing companies are concerned on the measures’ efficiency to prevent an equity base meltdown. As a result, voices have been raised to German legislators in order to ease the conditions for state equity injections into Corona-impacted companies.
The federal government’s new economic stimulus package is an important boost, but a large number of small and medium-sized enterprises are still experiencing a heavy strain on their liquidity, and the danger of insolvency has not been completely averted despite the easing of corona restrictions”.
Christian Vietmeyer, spokesman for the supply industry working group [ArGeZ], commented: “For the small and medium-sized automotive supply industry, which includes many aluminium processors, the situation caused by the virus is a catastrophe. […] The current shutdown of the automotive industry threatens the existence of the German supply industry and its employees.”.
As a result of lockdown, two-thirds of the companies surveyed expect supply shortages in the near future. Almost half of those surveyed expect negative effects on product sales; and one company out of ten anticipates lower sales in the medium term. Since 30% of all non-ferrous metal products flows directly into the transport sector, plant closures in the automotive industry will have a direct impact on sales. The negative consequences of the Covid-19 crisis have caused a major economic recession and a disruption in international supply chains, forcing the aluminium processing companies to reduce significantly their capacities. Restructuration is also being considered by companies: 86% of those surveyed perceive bottlenecks in their supply chains and expect them to become even more acute in the future. The development of sales in the participating companies differs depending on the industry in which they operate. While all respondents in the automotive sector say they are experiencing a slump of at least 10 percent, only one in two in the mechanical engineering sector confirm to face a similar situation, while the remaining respondents do not expect any clear impact.
However, the greatest obstacles to the further development of companies are seen in the regulatory measures; both volatile customs duties and tax burdens, as well as official and statutory environmental requirements, are perceived by all companies as potential brakes on development.
Interesting results emerged from the survey on the threat from competitors, two-thirds of them are considered to be from China and India (38 companies), only 1/6 see no challenge in them, while almost twenty percent take a neutral stance.
In the past, supporting the aluminium industry often resulted in trade rules regulation at EU level, and import duties served as the main measure of any EU industrial policy. As such, national administrations usually followed EU example: for the case of Germany, national measures were primarily aimed at supporting existing upstream industries, i.e. the aluminium producing companies and the non-aluminium processing companies, by reducing their energy costs as part of a wider regulatory intervention for energy intensive sectors.
The priority of European and German politics is, and always has been, focused on the steel industry. The aluminium processing industry, however, received little attention, regardless of its potential for a low-carbon and circular economy. Consequently, the interests of these aluminium companies were often neglected. Furthermore, the aluminium industry and the aluminium processing companies associated with it have recently been the direct focus of an international discussion on protectionist measures. Public attention was focused primarily on the aluminium producing companies rather than on the downstream sector, i.e. the companies that process the raw aluminium produced into a wide range of products.
However, given the nonchalance of decision makers on aluminium policies, it comes as a surprise that almost 55% of companies interviewed have heard of the Green Deal, while the 45% remain oblivious of it. There seems to be room for improvements in regards to political information and communication within the aluminium industry.
Consequently, it comes as a no surprise that most of the companies surveyed had not yet heard of the EU Recovery Plan, almost three-quarters of all companies surveyed (44) had not heard of it, and only a quarter stated that they had heard of the plan.
An easy short and mid-term solution: the elimination of the EU import tariff
Among their several recommendations, the study calls on, more particularly, for the lifting of import duties on raw aluminium as an easy-to-implement and immediately available measure; which would quickly reduce downstream production costs and support SMEs competitiveness on European and international markets. The idea of eliminating the EU import tariff of raw aluminum had already been supported in an analysis carried out in the early 2000s by Ecorys, and in particular by two studies carried out by the LUISS University of Rome in 2015 and 2019. It was then estimated that the total cumulative extra costs sustained by EU aluminium downstream industry, net of inward processing, was ranging between €529 million and €1 billion/year (for the period 2000-2017). First conceived to protect the European upstream sector from international competition, the EU tariff ultimately failed to prevent the delocalization of smelting activities in countries with lower energy and labor costs, as well as lax environmental regulations. Even worse, import duties on raw aluminium have been exerting upward pressure on any type of alloys’ pricing which further exacerbated the cost distortions for EU downstream transformers. This trend is set to increase as climate change, rising energy prices, the consequences of the Covid-19 pandemic, and the European Green Deal create deep cuts in the European economy. The impact of the customs tariffs is all the more significant for the EU downstream sector, as it represents a sizeable artificial and additional cost, and acts as a hidden subsidy for aluminium producers in and outside the EU. Overall, the FAIReconomics paper further expands the conclusion reached by the LUISS studies: the duty on primary aluminum penalizes the downstream segment – in which SMEs typically operate by adding high value productions and innovation – while favoring primary (vertically integrated) big firms. For the German market more specifically, the study has shown that the purchase of aluminium accounts for a considerable share of many companies’ turnover:
Downstream transformers, producers of semi-finished products are highly dependent on the economic conditions and physical availability of raw aluminium. Price fluctuations at a global level, which are closely linked to quotations on the London Metal Exchange (LME), and local supply and demand conditions have a strong influence on downstream activities and their competitiveness.
Independently owned downstream producers not only have limited bargaining power towards their suppliers (primary and/or secondary producers) but also face highly concentrated demand for their products. Inevitably, this pressure leads to a reduction in their profit margins and hinders their competitiveness. Raw aluminium can be imported duty free into the EU from countries that have signed preferential trade agreements (PTA) with the EU and from less developed countries (SPGA) covered by the Generalised Scheme of Preferences (GSP).
However, the EU market prices for imported raw aluminium systematically include the highest duty rate regardless of the aluminium’s origin. As a result, the EU-28 downstream producers are paying higher prices for all imported raw aluminium which, in this view, can be considered as an artificial premium and hidden subsidy in the advantage of larger domestic European aluminium producers. Furthermore, a very low share of the amount of duties paid by EU downstream operators is actually collected by EU customs (only 11-16%). About 39-51% of the overall cost imposed to EU downstreamers eventually becomes rents to EU primary and secondary aluminium producers, while 28-45% becomes profits to non-EU aluminium producers (although with duty-free access to the EU!). Altogether, this import tariff represents a net loss for the European economic system.
The EU import customs tariff for unwrought unalloyed aluminium also means that the premium for high-purity ingots on the EU market is higher than comparable prices in other world regions. In the period 2000-2017, about 50% of unwrought unalloyed aluminium and 75% of aluminium alloys imports came from countries with duty-free access to the EU market (i.e. Norway, Iceland and Mozambique). For the German market, the additional costs amounts to around €85 per tonne; which corresponds to an annual premium of more than €100 million/year. This extra artificial cost makes the adaptation of SMEs for future challenges more difficult.
Interestingly enough, only one-third of the companies surveyed were aware that an import tariff was levied on aluminium. Even worse is the widespread belief within the downstream industry that aluminium produced in the EU and aluminium imported into the EU share the same price and conditions. Almost three-quarters of the companies surveyed did not know that they were paying a virtual premium when purchasing their imported raw material.
When asked whether the tariff removal would be beneficial for their business, a vast majority of interviewees replied positively (85%).
The aluminium producing companies in Germany are structurally at risk. Due to the pandemic, many companies in the aluminium processing industry are working with restrictions. Almost all the companies surveyed are pessimistic on the near future. The consequences of the Covid-19 crisis, interruption in the supply chain, the deepest recession since 1945, the challenges inherent to the transformation of companies by the Green Deal, and the upcoming CO2 pricing are among the biggest challenges. Aluminium is part of complex upstream and downstream supply chains. As soon as the global economy takes off again, Germany will have to secure a competitive advantage – especially since China is boosting production and threatens Germany’s market share.
Germany must support the low-carbon innovation and high-quality manufacturing that will make the country an attractive investment market and trading partner.
However, further steps are needed to support the aluminium production and above all the aluminium processing industry – and primarily the existing and yet to be founded small and medium-sized companies. The study makes the following recommendations:
● Immediate elimination of the EU import tariff (see chapter n°5 of complete study): according to FAIReconomics, it makes little sense to inject billions to support the German economy while maintaining a trade barrier that burdens SMEs. An abolition of the customs tariff seems both logical and economically sustainable.
● Increased R&D support: Greater support for fundamental metallurgical research, and applied research for high-quality and durable packaging solutions and design products in the home and leisure sector (including recycled aluminium and scrap)
● Acceleration of R&D and applications: so that innovative products (e.g. lightweight construction, etc.) can reach the market faster.
● Reduction of bureaucracy: to reduce costs and increase agility. Administrative burdens penalize small and medium-sized enterprises disproportionately.
● Effective safeguards and remedies: German government should work towards establishing an effective and reactive EU trade defence policy; which prevents the dumping of unfair and carbon-intensive semi-finished aluminium products (mostly from China and India).
● The recovery plan in response to the coronavirus-induced challenge must support long-term growth in domestic production, high-quality manufacturing and low-carbon innovation. It must maintain a strategic advantage in aluminium to ensure security of supply for key sectors. And it must involve working with key trading partners to share best practices in adapting to the new conditions.
At the European level, it is important to review industrial and trade policy measures in the light of the overall European raw material strategy. The EU must take into account the different European needs for raw material, and bear in mind that the permanent supply of raw materials is an inevitable consequence of the Green Deal ambitions. Germany, as one of the world’s leading technology market and as an export nation, is indeed highly and increasingly dependent on a secure supply of raw materials (especially given the context of digitisation and climate change).
The German Federal Government must also adopt a new raw materials strategy to achieve its industrial policy goal of “strengthening the competitiveness of the industry and preserving jobs in the industry”. But even if economic measures are taken at the national level, it is inconceivable to be enforced without the European dimension.
Furthermore, the raw materials strategy also gives way for research on innovation, design efficiency and greater independence from raw material imports. The set priority is on long-term transformation and support to the application of knowledge, technologies and design competence; preferably based on regional cooperation.