Not only will the United States' recent announcement of Section 232 tariffs affect physical markets, it is also expected to put pressure on exchange aluminium prices.
The London Metal Exchange's three-month aluminium contract has been little changed at around the $2,100 per tonne since US President Donald Trump's decision to enact a 10% import tariff on aluminium,
But some market participants expect exchange prices to come under pressure in the coming due to an oversupply of metal in the European market.
“As investors assess the full impact of the tariffs we could remain under pressure. It would seem that the market is still uncertain of the implications of the tariffs. The US imports more aluminium from Russia than it does China, so you have [to] question the overall impact [that] this will have on the market,” Geordie Wilkes, head of research at Sucden Financial, told Metal Bulletin.
“There remains plenty of metal capacity in China and this policy has not changed that. Where is this metal going to go? Europe is the obvious destination and we could see some softness in the European market in the short term,” he added.
The majority of the impact of the 10% tariff on US aluminium imports, which is set to be implemented in 15 days, will be felt in the physical market. But most industry players believe that eventually there will be a significant impact on exchange prices as well.
“Initially the impact will be much more evident in the physical market and premiums but the effects will take time to work through. But overall it will be negative for prices,” Guy Wolf, global head of market analytics at Marex Spectron, told Metal Bulletin.
“By setting a tariff you are making local prices higher and incentivizing higher domestic supply. Also, the material that was previously imported is now elsewhere. So overall, it is a negative as you end up with more supply in theory,” he added.
Although there was a general recovery across the base metals complex on Friday March 9, last week was negative overall for base metals due to fears of a "trade war," leading some participants to shift to the sidelines and driving some LME three-month futures prices to 2018 lows on Thursday.
“The pressure stays on in metals with prices moving lower as global trade uncertainty increases with President Trump effectively starting a trade war and investors stepping away, if only temporarily, from the metals sector,” according to Malcolm Freeman, director and chief executive officer of Kingdom Futures.
With aluminium, in particular, there are other reasons to be cautious about the LME price, with on-warrant stocks up by 228,675 tonnes already in 2018. Stocks are tightly held, with one entity accounting for 30-39% of warrant positions.
The LME's three-month aluminium contract finished at $2,120 per tonne on Friday, up slightly from $2,106 per tonne at Thursday's 5 pm close.
“Moreover, the US Federal Reserve's shift to tighten monetary policy will increase pressure on off-market warehouse deals, which rely on cheap finance. Stocks booked for removal currently account for 17.7% of [overall inventories], down from 22% at the end of January,” Metal Bulletin Research analyst James Moore said.
“Rising stocks in China and the prospect of new low-cost capacity additions suggest there are still downside risks to the underlying fundamentals from rising production,” he added.
Shanghai Futures Exchange stocks also continue to mount, totaling 846,913 tonnes on March 9 versus 100,722 tonnes at the end of 2016.
“There are other issues in aluminium as well with respect to the situation in China. Again, a policy-led change in the market, which is now being questioned as to the sustainability. Had this not already caused weakness, we probably would have seen a larger effect from the tariffs,” Wolf said.