Mexican tariffs affect the aluminium supply chain, driving up premiums

Fernando Garcia Martinez, vice president of operations at Mexican aluminium institute IMEDAL, said that the entire light metal supply chain is being impacted, with premiums rising, including in the United States. Under a side agreement within the United States-Mexico-Canada Agreement (USMCA), imports from Mexico are exempt from Section 232 tariffs. However, Mexico must enhance its monitoring measures and trade data reporting under this agreement.

Aluminium faces new tariff 

Recently, Mexico announced an increase in import duties on various goods, as outlined in a decree published on April 22. Among these goods, aluminium faces new tariffs ranging from 20 to 35 per cent. As per the reports shared by Fastmarkets, the document addresses situations where international trade practices disrupt fair market conditions, mainly affecting national industry sectors. Tariffs on other products, such as paper and steel, also see adjustments, ranging from 5 per cent to 50 per cent, to ensure stability and fairness within the market.

Garcia Martinez noted that companies operating in sectors such as auto parts, air conditioning, and extrusions are temporarily shutting down operations. The auto parts sector is particularly concerned, as failure to meet contractual volume obligations could result in severe repercussions for automakers.

"We are in contact with authorities to reach a solution. This was not negotiated properly and is a result of intense US pressure [for trade monitoring in Mexico]. The announcement was completely unexpected and surprised everyone. It left the industry in shock," added Garcia Martinez. 

What the decree or the document highlights

The document further asserts that the proposed measure aligns with international law, stipulating that imports from countries with Mexico have trade treaties and will receive preferential tariff treatment if they meet the specified requirements. In addition to aluminium, the tariffs also apply to a range of other goods, including textiles, clothing, footwear, wood products, plastic and its derivatives, chemical products, paper and cardboard items, ceramic products, glass and its derivatives, electrical equipment, transportation equipment, musical instruments, and furniture.

The tariff announcement received positive feedback from the US Aluminum Association, headquartered in Washington. President Charles Johnson, speaking on April 23, highlighted the longstanding concern over state subsidising Chinese aluminium products, impacting imports from China. He emphasised the ongoing efforts of the US, including the imposition of anti-dumping and countervailing duties, to address this issue.

"We have seen state-subsidised metal from China flow through other markets, including the Mexican market, using Chinese or Russian metal as an input at an unfair advantage," said Johnson, who added that imports of subsidised Chinese aluminium to Mexico caused Mexican manufacturers to be priced out of their market and to turn to markets in the US. 

Conversely, García Martínez pointed out that while the US expresses concerns about the significant growth in aluminium imports from Mexico, Mexico's market share accounts for only approximately 1 per cent.

IMEDAL's reaction

IMEDAL also raised concerns regarding Mexico's trade monitoring system mandated under Section 232. This issue was emphasised during USMCA negotiations to guarantee prompt responses in case of sudden trade flow increases.

On April 25, IMEDAL issued a statement urging the Mexican government to refrain from implementing tariffs on aluminium. The statement particularly emphasised the proposed 35 per cent duty on unalloyed aluminium (ingot) and the 20 per cent duty on alloyed aluminium (such as billet and primary foundry alloy). 

The institute highlighted potential severe repercussions, including reduced competitiveness within the Mexican industry and increased prices for end consumers resulting from these new tariffs. IMEDAL underscored that one of the primary reasons for concern is Mexico's lack of primary aluminium production. It emphasised that its existing free trade agreements (FTAs) with the US and Canada may not sufficiently mitigate the impact.

"The joint production capacity of the United States and Canada is insufficient to cover the demand of the three countries, since only 4 million tonnes are produced [in the region], while [total] demand is 6 million tonnes. It is worth mentioning that these new tariffs open the possibility for prices to go up, as they come only for these countries," the April 25 statement said.

Market reaction

Market participants are grappling with uncertainty following the unexpected announcement of the new tariffs. There's widespread speculation surrounding the implications for the IMMEX program, with questions about whether buyers will incur tariffs and how these duties will affect trade flows.

The IMMEX program, also known as the IMMEX maquiladora program, enables foreign manufacturers to import raw materials and components into Mexico duty-free. However, this privilege is contingent upon all finished goods being exported out of Mexico within a government-prescribed timeframe. Maquiladoras, foreign-owned factories in Mexico, operate under this program, producing goods for export to other countries.

“There has been confusion regarding the application of IMMEX and other programs. In the case of IMMEX, the import duty could be deferred, but it would be paid when exporting the material, especially if that goes into the US, because of Section 232. The vast majority of Mexican exports are to the US,” said Garcia Martinez.

“It’s terrible, because Mexico does not produce primary aluminum. It could affect the Midwest – it already started to rise a little. There are many doubts about how this tax will be calculated. And it’s election season, so we don’t know how long it will last,” he said, adding that he does not see a large movement of exports to Mexico from Europe – only if they were from plants that didn’t export before. “Mexico will look for alternatives other than the USA, such as Malaysia, Venezuela, South Africa, Vietnam and Australia,” said an aluminium trader in Canada .

“Maybe Canadians will try to export more to Mexico, but I know it’s pretty hard for Mexicans to trust new people. I don’t see Venezuela being a market for Mexico, maybe Malaysia or South Africa. But I don’t see Mexico looking for new suppliers at all – probably they will stick mainly with the USA,” as told by an US aluminium trader to Fastmarkets.