COVID-19 impact: US aluminium’s unfavorable price baffle as premium collapses

The hardest-hit industrial metals by the COVID-19 epidemic are Aluminium. The London Metal Exchange (LME) reflected the price slammed a four-year low of $1,455 per tonne in April’20 and is brawling to recover, as the last trading marked at $1,525.

Inventory has spewed, with 663,475 tonnes of metal placed on LME warrant since the middle of March’20, raising headline exchange stocks to a three-year high of 1,493,775 tonnes.

COVID-19 has squeezed both demand and price with a unified producer supply response requirement. The strapped global market dynamics look even worse in North America, where the physical premium has imploded since March’20.

So severe has been the collapse that aluminium could be facing its own WTI oil moment with the premium turning negative.

In actuality, contrary the April’20 meltdown in the WTI oil contract, no-one in the United States will be trading a negative price for their metal. The U.S. aluminium market remains defined by the 10% import tariff introduced by the Trump Administration in May 2018.

The shadow of a negative premium is just the latest reflection of the divisive power of those tariffs.

The CME Midwest Aluminium spot contract has fallen to $179 per tonne (8.105 cents per lb) from over $300 in mid-March and a peak of almost $500 in 2018 after the tariffs were first introduced.

Plot the premium on a chart and it appears to have fallen to its lowest since 2017. But that doesn’t allow for the tariff effect.

The CME contract is based on S&P Global Platts’ assessment of the price of metal delivered to a user in the U.S. Midwest. The resulting premium has always been duty-paid. Just there was no duty prior to 2018, and now there is.

The pricing agency effectively launched a duty-unpaid aluminium indicator, based on the simple mathematics of deducting the 10% duty and the estimated cost of freight to a Midwest user. As such, duty-unpaid metal in Canada is currently calculated at just 2% lb, or $44 per tonne.

Indisputably, were the duty-paid premium to fall further, there is the possibility for the duty-unpaid premium to turn unfavourable.

Since the aluminium premium for U.S. delivery has never been negative before, the anticipation has evoked some to suggest Platts should introduce a floor price on the unpaid premium. The agency is currently consulting on the specifications of its premium assessments.

However, the U.S. beer-makers, who use a lot of aluminium, are vehemently against the idea.

According to Mary Jane Saunders, general counsel of the Beer Institute, writing in an open letter to Platts: “A price floor is a price control (and) Platts cannot create price controls to inhibit the market from operating freely in accordance with the law of supply and demand.”

The institute has been a vocal critic of the post-tariff pricing landscape in the United States, its members paying duty even on domestically produced metal.

Europe has liquid markets in both duty-paid and duty-unpaid. Dutch ports such as Rotterdam and Vlissingen have long been global storage hubs for duty-unpaid metal. But as far as U.S. delivery is concerned, the duty-unpaid premium is a purely mathematical calculation.

Cash metal has been crushed by the collapse in North American aluminium demand, particularly from the all-important automotive and aerospace sectors. The CME contract structure suggests the market is pricing in a slow recovery in usage in line with lifting lockdowns.

Beer-makers have likely fared better than automakers during quarantine but their aluminium pricing problems remain.

Beer-makers are surely right to argue they shouldn’t have to pay the duty on domestic production or even on Canadian imports after last year’s United States-Mexico-Canada Agreement on trade.

Roger Bertozzi, head of EU and multilateral affairs at the Federation of Aluminium Consumers in Europe (FACE) said: “There is no duty-free priced unwrought aluminium available to EU users and consumers.”

Bertozzi explained: “Through a non-transparent market mechanism, the equivalent of the value of the highest level of the tariffs structure, or 6%, is included in the market premium for all the unwrought aluminium sold in the EU, irrespective of origin.”

Imposing of Tariffs has been developed as the principal problem for Europe’s consumers and now it has spread its arms to the USA.