Monday, October 5, 2020

Beer-Drinkers and Tax-Raisers

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.

No comments: