(The opinions expressed here are those of the author, a columnist for Reuters.)
* US Aluminium Premium: tmsnrt.rs/2XMBR2y
By Andy Home
LONDON, June 14 (Reuters) - The United States last month removed tariffs on imports of steel and aluminium from Canada and Mexico.
A stroke of the presidential pen has liberated the largest supplier of aluminium to the U.S. market from the 10% duty that was imposed in the middle of last year.
Canada accounted for 51% of total U.S. imports of primary aluminium in 2018. Australia and Argentina were exempted from tariffs from the start and together with Mexico they accounted for another 8% of the country’s imports.
The gradual return to supply-chain normality is not being matched by a return to pre-tariffs pricing in the U.S. market.
The U.S. Midwest Premium, which overlays the London Metal Exchange (LME) cash aluminium price, remains elevated. The CME front-month contract currently stands at 18.75 cents/lb ($413 per tonne), compared with less than 10 cents at the start of last year.
U.S. consumers are understandably unhappy. Beer makers, who use a lot of aluminium sheet, are calling for an investigation into how the premium is assessed by S&P Global Platts. Not for the first time.
However, they and other users may have to start thinking harder about how their own pricing works since the premium is currently suggesting higher U.S. prices may be here to stay.
S&P Global Platts, which assesses the premium underpinning the CME contract, is once again caught in the cross-fire of a heated debate as to why the premium hasn’t “normalised” after the U.S.-Canadian deal.
Calls for regulatory scrutiny miss the target on two counts, however.
Firstly, although U.S. regulator the Commodity Futures Trading Commission (CFTC) doesn’t have oversight of the underlying Platts premium benchmark, it does of its own contract.
It can be inferred that a good degree of indirect oversight already exists.
Secondly, the premium is often presented as a mechanistic calculation based on the cost of delivery to a U.S. consumer. It is that, but also much more.
It is now a regional market in its own right. The CME contract traded volumes equivalent to almost 2.5 million tonnes last year. The London Metal Exchange has just launched its own premium contract.
And as with all commodity markets, the price is a product of multiple supply-demand drivers, not just trucking rates or tariffs.
That much should be clear from the fact that the premium exploded from less than 10 cents to more than 22 cents per pound last year, way beyond any implied cost of a 10% tariff.
There was more in the mix then, and there is more in the mix now.
The accelerator in last year’s premium spike came in the form of sanctions imposed in April on Russian producer Rusal, historically the second-largest supplier of primary aluminium after Canada.
Those sanctions have now been lifted, but other fundamental premium drivers are still in place.
The tariffs may have kick-started a revival in domestic U.S. aluminium production but any impact on regional supply has been offset by the near total curtailment of the Becancour smelter in Canada.
A union lock-out has been in place since the start of last year, removing around 350,000 tonnes of annual capacity.
North American aluminium production has increased by only an annualised 90,000 tonnes since the tariffs were first announced in May last year, according to the International Aluminium Institute.
U.S. demand for primary aluminium meanwhile has been running at robust rates as the products segment of the supply chain thrives. North American demand grew by an estimated 4% last year, according to the U.S. Aluminum Association.
In the context of such regional fundamentals, there is no obvious incentive for producers from tariff-exempt countries to drive down the premium, particularly when the U.S. is still sucking in metal from duty-paying suppliers such as Russia.
Moreover, behind the headlines of heavy Chinese exports of aluminium products and structural overcapacity there is a growing global deficit of primary metal and a resulting drawdown in off-market stocks, according to analysts at research house CRU.
The current stickiness of the premium at these high levels suggests a collective market rethink about what such regional and global dynamics mean for the delivered price of aluminium in the U.S. market.
Which is of course bad news for consumers such as the beer sector, which is increasingly shifting from glass to metal can packaging.
The collective view is that the sector is paying too much for its aluminium. The high U.S. premium is an obvious target but one that is unlikely to respond to even the most vocal political lobbying.
If the industry is paying too high a price, it is down to its failure to react to the new pricing landscape.
The Beer Institute has commissioned research from analysts at Harbor Aluminum and estimates the beverage industry paid $250 million in aluminium tariffs between March and December last year. (“One Year After Tariffs, Brewers Are Overpaying for Cansheet,” March 25, 2019)
The U.S. government collected only around $50 million in tariffs. Some of the difference, an estimated $27 million, went to U.S. primary aluminium smelters but the bigger part, $173 million, went to U.S. rolling mills.
The latter, apparently, have been pricing their can stock to include the 10% tariff even though primary metal only accounts for around 30% of the input. The rest comes in the form of much cheaper recycled metal.
As the Beer Institute notes, “the U.S. beverage industry paid a tariff for all of the aluminum cansheet as if it consisted entirely of imported primary aluminum”.
Which is surely not how the U.S. Administration saw things panning out when it introduced aluminium tariffs to reinvigorate the domestic supply chain.
A wholesale overhaul of contract terms between rolling mills and their beverage customers looks overdue.
Because the Midwest aluminium premium doesn’t seem about to “normalise” any time soon.
On the CME contract forward prices briefly lurched lower when news of the Canadian deal broke on May 17.
However, they quickly recovered, with the spot contract completely undisturbed in the gentle downtrend that has been in place for several months.
In commodity markets, particularly the opaque physical market-place, price can be the best signal. The U.S. aluminium premium right now is suggesting higher prices are going to be around for a time yet.
Editing by Jan Harvey