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Tariff turbulence


The tariff signed into law by US President Donald Trump in March has had the effect of forcing market participants to consider what the new normal is for the US aluminium market – with uncertainty still lingering as to who will be affected by the tariff.

The tariff – a 10% tariff levied on imports of various aluminium ingots and products into the US – has set into motion a realignment of what aluminium prices and premiums should be, considering that the US relies on imports in order to cover demand for the metal. After the tariff was signed into law by Trump on March 8, the US Midwest P1020 spot premium has risen by 32%, to 22-23 cents per lb as of April 23.

At the time the tariffs were signed, market participants were concerned about the severity of the regulation – as it is even stricter than the option proposed earlier by US Commerce Secretary Wilbur Ross, which was a 7.7% tariff on all aluminium imports into the US. Other options, including a tariff of 23.6% on select “problem” countries and enforcing a quota on some/all companies, were considered more likely, and reasonable, by market participants.

However, even though Trump opted for a more severe market, the US Government soon reached temporary agreement with a host of countries to exempt them from both the aluminium and steel tariffs introduced. The agreement is set to expire on May 1, but it allowed exemptions for the countries/regions of the European Union, Argentina, Australia, Brazil and South Korea. North American Free Trade Agreement (Nafta) partners Canada and Mexico are also exempt from the tariffs, pending renegotiations of the trade pact. South Korea has since landed an exemption on a more permanent basis, and other countries such as Japan have voiced their desire to be considered exempt from the US tariffs.

While the exemptions have had the short-term effect of quelling further dramatic moves to the market, market participants are still wary about what the future holds, owing to the temporary nature of the exemptions as they are currently, as well as the way in which the tariffs – implemented following the US Department of Commerce’s Section 232 investigation into the national defense implications of steel and aluminium imports into the US – were rolled out.

Trump initially announced the steel and aluminium Section 232 probes separately in late April 2017. At the time, the administration promised a quick decision and prompt action to address the findings of Commerce’s investigation. However, the investigation lingered until near its deadline of January 2018 – with some market participants unsure that any investigation or decision would ever materialize.

The overall unpredictability of the Trump administration is also considered a source of uncertainty among market participants – with the latest flare-up in the aluminium market stemming from sanctions on Russian oligarch Oleg Deripaska and companies owned by him, including major supplier to the US, UC Rusal.

The sanctioning, which prevents Rusal from selling its aluminium to US customers, has had a considerable effect on both US premiums and global aluminium prices, pushing the London Metal Exchange (LME) 3-month contract to a near-decade high of $2,587 per tonne a mere two weeks after the sanctions were announced. The news also pushed the US Midwest premium close to an all-time high almost overnight.

LME prices have since corrected from the post-sanctions high, as the Department of the Treasury announced an extension of the deadline for US companies to wind down any entanglements with Rusal to October 23, from a previous deadline of June 5. However, it is this quick series of transformative changes – and reversals thereof – that have left the US aluminium market uncertain about how the Trump administration will handle the aluminium tariff going forward.

“Who knows what he’s going to tweet tonight or say tomorrow,” says one US aluminium buyer. The movement of aluminium prices and premiums moving forward can quickly diverge dependent on what the Trump administration does or does not do regarding the implementation of the tariff. Should more permanent agreements be announced with the countries already granted temporary exemptions – most notably Canada – then the market may be able to exhale, allowing prices to move back down to more familiar levels. The formation of more permanent agreements will also signal to the market that the tariffs are meant to protect the US from unfair competition from “problem” countries such as China, and would set a precedent for an orderly handling of the exemption process.

However, should the temporary exemptions be allowed to expire, then chaos will again descend onto the market. Because the US is undersupplied in terms of domestic aluminium production, imports are required to fulfill US demand from consumers – and stiff tariffs create a significant barrier for these necessary imports. Should further chaos take place with the tariffs, then prices will likely be akin to a rollercoaster – until the market is numb to the volatility, and companies instead decline to do further business in an unsafe environment.

Written by Kirk Maltais

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