By Kevin D. Williamson
Thursday, October 01, 2020
Here is a sobering fact: The No. 1 input expense for
American beer brewers isn’t barley or hops or cool refreshing Rocky Mountain
spring water or anything like that.
It’s aluminum.
Some of your smaller hipster craft brewers may spend more
on fire-roasted blood-orange rind or oaken staves made from used cabernet
barrels or whatever, but for your big-time chugga-lugga available–at–7-Eleven
brewers who sell beer by the truckload and the trainload and the boatload, the
single biggest cost is cans.
And that is why America’s brewers hate Peter Navarro more
than they hate floofy wine coolers.
“If it’s Trump, then it’s Peter Navarro, and it’s more
tariffs,” says one industry lobbyist. The tariffs the Trump administration
imposed, suspended, reimposed, and then resuspended on Canadian aluminum
imports have played havoc on the beer industry’s finances and supply chains.
The beer barons worry that a second Trump term would come with even more
disruption to their businesses.
The brewers are collateral damage in a trade war that
doesn’t have much to do with them. In addition to imposing a broad range of
punitive tariffs on Chinese goods, the Trump administration has been especially
persnickety about aluminum from Canada. Trump imposed tariffs in 2018 but was
arm-twisted into suspending them, briefly, to get the USMCA (United
States–Mexico–Canada Agreement) trade deal passed. Almost as soon as the USMCA
was passed, Trump announced he was reimposing tariffs on Canadian aluminum. In mid-September,
he announced he was suspending that tariff for the rest of the year — but,
after that, who knows?
The stuff beer-makers care about is a relatively
low-margin aluminum product known as “can sheet.” Not a lot of it is made in
the United States. Other than the aluminum sheet that is used to make that
hideous siding, can sheet is the least lucrative grind in the
aluminum-processing industry. And, as with many other lower-margin manufactured
goods, production of can sheet has been migrating out of the United States for
years, with U.S.-based companies concentrating on more profitable lines of
business such as aluminum for automobile and aerospace applications. The big
players in low-margin can sheet are in China — no surprise there — and in Saudi
Arabia. (Imagine that: A nice, cold, domestic brew made possible by a packaging
assist from the people who brought you the Islamic Committee for the Promotion
of Virtue and the Prevention of Vice.) Many U.S. brewers would prefer to
get their can sheet from U.S.-based providers, which tend to be more reliable
and more predictable than companies operating under the rule of backwards
police states in faraway places. But there simply isn’t enough U.S.-made can
sheet to satisfy U.S. consumption, and so aluminum consumers such as brewers
can’t just dump overseas providers in response to tariffs.
Chinese aluminum was subjected to tariffs, along with
most everything else made in the so-called People’s Republic. But it really
wasn’t cheap Chinese can sheet that led to the protectionist aluminum measures —
it was the higher-end stuff produced by those nefarious . . . Canadians.
The Canadians are the ones who compete most directly with U.S. producers.
The problem with the Trump tariffs is pretty typical of
what happens when the rules of an industry are made by chuckleheads in
Washington who don’t know the first thing about how the businesses they are
interfering with actually operate. The tariffs didn’t create new opportunities
for U.S. producers — they just raised prices for U.S. consumers. U.S. brewers end
up paying the same high price for recycled domestic scrap as they do for
imported aluminum.
“Tariffs are taxes and taxes are job-killers and
prosperity-killers,” says Jim McGreevy, CEO of the Beer Institute, a trade
group for brewers. “The impact on end users has been grave. It’s not just
brewers but soda-makers, airplane manufacturers, automobile manufacturers —
anyone who uses aluminum has seen a dramatic increase in the cost.” That hurts
businesses of all kinds, but it is especially painful for brewers, because
aluminum makes up such a large share of their expenses.
Aluminum prices are, as it turns out, kind of weird.
There’s an aluminum price published by the London Metal
Exchange, and there is the “Midwest Premium” published by Standard &
Poor’s. S&P insists that the Midwest Premium is just a price that its
analysts calculate, or, more precisely, the difference between the LME spot
price and actual prices negotiated between sellers and buyers in the midwestern
United States. But brewers and other aluminum consumers complain that the
Midwest Premium functions as an effective surcharge that aluminum sellers
exploit to pass along warehousing and transportation costs in a coordinated
fashion. McGreevy and others have suggested that this may amount to improper
collusion or market manipulation, while S&P retorts that it is not an
investment house or a commodities exchange but a publisher, and that what it is
engaged in is, essentially, journalism. If you remember the criticism
S&P and other bond-ratings agencies endured for putting AAA ratings on all
those subprime-mortgage securities before the financial crisis, then you’ll
recognize that First Amendment line of defense.
The LME price and the Midwest Premium diverge for a
number of reasons, one of which is that there are really two aluminum markets
and two aluminum prices: one for the investment houses that are engaged in
aluminum trading as a purely financial matter — firms whose executives wouldn’t
have any use for a ton of can sheet if it were dumped in front of their Wall
Street offices — and another market, related but distinct, for the companies
that want to take possession of some physical aluminum and make something such
as beer cans out of it.
Another layer of complexity comes from the “conversion”
costs imposed by the processors that turn raw aluminum into semifinished
products such as can sheet. These companies also act in a way that often
appears coordinated, for example by announcing identical price increases at the
same time. This isn’t necessarily illegal market manipulation: These are very
efficient markets in which it is easy to access prices in real time — the same
conditions that allow airlines, to take an example from a different industry,
to frequently raise or lower prices in close conjunction with one another. They
could be conspiring behind the scenes, or they could just be checking their
competitors’ prices every 30 seconds.
Without a lot of bargaining power in the aluminum market,
Big Beer is feeling the crush from both sides. The tariffs drove up the price
of cans, but people who buy beer in cans are very price-sensitive shoppers. And
so, like McDonald’s or Walmart, big brewers cannot simply pass along their
costs to consumers, even when they themselves own or control the
semi-monopolistic distributor networks that act as market middlemen. Raise the
price of beer in cans too much and consumers will turn to bottled beer, wine,
liquor, or other alternatives. The stuff advertised during NFL games —
“mainstream” beer, as the industry calls it — doesn’t do well when it is priced
too close to “craft” beer. Tariffs can force big brewers to pay higher prices
for cans, but the brewers cannot force their consumers to pay higher prices.
In September, the Trump administration announced it was
suspending its punitive tariff on Canadian aluminum for the rest of the year.
But brewers worry that the tariff will return, and, in any case, a heavy price
already has been paid: Hundreds of millions of dollars went out the door before
the administration backed off the tariffs. Taxes are funny things: A
beer-industry analysis found that the tariffs raised $81 million for the U.S.
Treasury but imposed a whopping $582 million in costs on brewers, with most of
the money going to processors that were not subject to the tariff but were
nonetheless able to sell their products at tariff-inflated prices.
But even if the tariff-happy Trump is not around in
January to muck with their business, brewers worry that there is more political
trouble ahead, with Joe Biden and Nancy Pelosi engaged in their own
saber-rattling at foreign trade. “I will use tariffs when they are needed,”
Biden told the United Steelworkers union in May. Beyond trade restrictions,
congressional Democrats specifically singled out the beer industry as an
emerging “monopoly” in their “Better Deal” economic agenda, decrying in
particular the expansion of InBev, the Belgian company that acquired
Anheuser-Busch in 2008. In July, InBev reported a 17.1 percent decline in sales
volume and a 17.2 percent decline in revenue.
When Trump imposed the tariffs, he tweeted: “Trade wars
are good, and easy to win!” The view is somewhat different down on cannery row.
But, then, the president doesn’t drink beer.
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