Section 232, spread uncertainty cause European aluminium market to freeze

A lack of clarity about the outcome of the Section 232 investigation and how long the backwardation in London Metal Exchange forward spreads will persist have led to an impasse in the European aluminium market, with bulls less confident than they were despite still-elevated premiums.

The P1020A in-warehouse Rotterdam duty-unpaid aluminium premium remained at a one-year high of $100-107 per tonne in-warehouse on top of LME cash prices, according to Metal Bulletin's assessment on Tuesday February 20, with participants more hesitant to do business.

This has resulted in a significant decline in the number of transactions, bids and offers reported in the past sessions.

“I haven’t been able to do anything this week. People aren’t doing anything anymore,” a trader in Europe said.

“We are in a wait-and-see situation,” another said.

The bullish tone, with bulls forecasting premiums to rise to $120 per tonne in the first quarter because of tight supply, has paused for now.

Instead, most participants seem unsure about what positions to take - although supply is currently tight, it might not remain so for long if US import duties make Europe a more attractive destination or if LME spreads force stockholders to release units that are expensive to finance.

Section 232: more questions than answers for Europe
Participants in Europe are trying to work out how the latest round of recommendations from the Section 232 investigation in the United States might affect the European market.

The three recommendations by the US Department of Commerce, which include a uniform tariff on all primary aluminium, a targeted tariff on metal from certain origins and an import quota, are more drastic than anticipated.

The most bearish outcome for premiums in Europe would be the introduction of a tariff on metal from Russia, China, Vietnam, Venezuela, Hong Kong and Venezuela, market participants said.

The main concern for the European market is that products from those countries could flood into Europe if the US market becomes too difficult and expensive to enter.

“For the aluminium and steel markets, we believe domestic prices in the United States would rise if any of the proposed measures were introduced. At the same time, global prices should fall, as oversupply outside of the US would increase,” Julius Baer analyst Carsten Menke wrote in a note.

The tariff targeting specific countries is “probably worst for Europe if Russian material stops going to the US and starts flooding Europe,” a third trader in Europe said.

The recommendations are also expected to have a slowing effect on metal leaving Europe for the US. Metal headed to the US has contributed to the tight supply in Europe, which in turn has kept premiums such as the Rotterdam in-warehouse rate at elevated levels recently.

Estimates of the volume of metal that has left Europe for the US in recent months range from 20,000 tonnes to 90,000 tonnes.

US President Donald Trump will make a decision on the Section 232 findings for aluminium by April 19, which gives fewer than two months for metal to arrive to the US and clear customs.

“People would stop sending over metal to get them there in time,” the third trader said.

Although the outlines brought some clarity to what the US could do in terms of trade measures, participants say unknown factors continue to cloud expectations.

The outlook for European premiums remains murky, especially if other countries take retaliatory trade tariff measures that could disrupt the flow of aluminium.

“If the US imposes duties, it’s clearly political and a slap in the face,” a fourth trader in Europe said. “What’s going to come next? You can be sure Russia and China won’t just sit idle.”

The outlook is made yet more unclear given the possibility that Trump might not impose any duty or might impose a modified duty or quota not listed in the outline.

Tight spreads cause market to slow

Another factor partially stymieing volumes is the persistent backwardation in nearby forward spreads on the London Metal Exchange, which makes it much more costly to hold metal over time while market participants wait to see when and if it will fade.

The backwardation in the cash/three-month spread has been volatile, touching its widest in 11 years at $50 per tonne on Tuesday February 20 before narrowing to around $15b per tonne on Wednesday.

The spread cast some gloom over the European physical market, with one trader saying it was more advantageous to deliver onto the LME instead.

“This backwardation is now at the levels that it will start touching the premium. If you look at the back and FOT [free-on-truck] rates, you’re getting up to $80-90 per tonne. That is not too far from [Asian and European premiums],” a fifth trader said when the backwardation was around its widest on Tuesday.

“It has the capacity to lower Asian and European premiums, if this continues,” the trader added. “You can go through the hassle of shipping to a customer wherever and you have to wait for your money or you can go straight to the LME.”

Still, strong supply and demand in Europe should support the market for now, participants said.

“So far, in the physical market, we don’t see any immediate impact,” a sixth trader in Europe said.

The volatile spreads have prompted some market participants to move to the sidelines to assess if the backwardation is temporary.

Several participants, who were regularly offering and bidding, have said in recent weeks that they have reduced their trading activity given the present conditions. This has led to reduced spot availability for some.

“We see that we get less offers in general. There's not too much material in the market,” a consumer in Europe said.

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