US President Donald Trump has confirmed that he will enact a 10% tariff on aluminium imports into the United States as a result of the Section 232 investigation into the national security impact of such imports – but market participants were unsure if those duties hit the mark.
Market participants around the globe generally favored a combined tariff-quota trade measure, such as the second recommendation from the US Commerce Department, as the most effective for curbing Chinese overcapacity of primary aluminium while allowing the US primary industry to heal.
But industry experts doubted whether Trump’s decision to take a tougher approach on imports as a whole would be helpful in that regard.
“[It’s] a sledgehammer approach,” John Mothersole, director of research, pricing and purchasing service at London-based IHS Markit, said on March 1. “[It’s] great for steel and aluminium makers - a disaster for users.”
“A higher tariff on everyone doesn’t do the job,” independent analyst Lloyd O’Carroll told American Metal Market in an interview last week. “You’ve got guys breaking the rules in China [and] some other places. Tariffs on everyone doesn’t really solve the problem.”
No word on Nafta
In his March 1 meeting with top steel and aluminium executives, the president did not say whether the tariffs would apply to aluminium sourced from North American Free Trade Agreement partners Canada and Mexico.
That omission is significant not only for the US downstream market, which sources aluminium from Canada, but also for European market participants hoping to determine if a flood of Canadian material will be redirected to their shores.
“Are they going to let Canadian material be tax-free? That decides where the metal will go,” one trader in Europe told Metal Bulletin regarding the 232.
The EU-Canada Comprehensive Economic and Trade Agreement, signed in 2016, allows for Canadian-produced metal to avoid the European Union’s 3% duty on aluminium ingots. The deal was expected to shift aluminium out of the US market, but the strength of the US Midwest premium versus the Rotterdam premium kept up the steady flow of metal from Canada to the US.
But if metal were redirected to Europe, the EU could set its own quotas on foreign metal, including shipments from Canada, according to the Aluminum Association of Canada’s top executive.
“Other markets have to protect themselves,” Jean Simard, president and chief executive officer of the association, said on Thursday. “We’re entering into a retaliation mode [worldwide]. It’s an overall trade war starting.”
Premiums up, participants down
Aluminium premiums appear to have responded to Trump’s news. Multiple market participants confirmed that the P1020 premium was being quoted higher after the announcement, and Midwest premium futures on the CME showed a stark boost. The July futures contract rose by 2.5 cents to reach 17 cents per pound, up from 14.5 cents on Wednesday February 28, CME Group figures show.
But for downstream market participants in the US, the tariff simply makes aluminium more expensive – hindering their ability to be competitive.
“We’re talking about getting 700 jobs back? Woo! Let’s charge everybody money,” a second supplier quipped, describing the tariff as “downstream costs getting passed down to you [and] I.”
And automakers in particular highlighted increased costs that segment will face as a result of both aluminium and steel tariffs.
“These proposed tariffs on steel and aluminium imports couldn’t come at a worse time,” American International Automobile Dealers Association president and chief executive officer Cody Lusk said in a statement March 1. “Auto sales have flattened in recent months, and manufacturers are not prepared to absorb a sharp increase in the cost to build cars and trucks in America. The burden of these tariffs, as always, will be passed on to the American consumer.”
“Of all of the options, this is the one that does the least against China,” a source in the downstream sector agreed. The damage a 10% tariff could do to aluminium extruders and other downstream entities would dwarf any benefit the tariff would have for companies like Century Aluminum Co, this source argued.
That company last week said plans to restart capacity at its Mount Holly smelter centered around the strength of Trump’s 232 decision.
"Thanks to the president's leadership, once the tariffs are in place, we will work with the Commonwealth of Kentucky to restart our idled Hawesville, Kemtucky, smelter - including the high-purity production that is so critical to our nation's defense - and bring back American jobs as soon as possible," Century president and CEO Michael Bless said in a statement March 1.
The appearance of favoring upstream over downstream segments was not lost on the stock market: The Dow Jones Industrial Average fell precipitously in the wake of the announcement, dropping 475.9 points compared with the previous day’s close as of Thursday afternoon.
Market participants also worried about the potential for retaliatory trade measures.
“There is too much uncertainty on implementation [of the tariff], and [there’s] a big risk of retaliation,” according to a third supplier.
The Chinese government previously said that it would “take the necessary measures to safeguard its legitimate rights.” And European steel association Eurofer warned of retaliation in the face of blanket restrictions, and advised Trump to avoid a global trade war.
Even if countries don’t respond to the tariff overtly, the US may still get cut out of the global aluminium flow - while experiencing a deficit for primary aluminium. If that happens, it will likely take smelters a period of months to restart previously idled capacity.
Still, not all sources who spoke to American Metal Market were alarmed by Trump’s decision.
“It is what it is. What can you do?” a fourth supplier asked. “I think it’ll take some time to sink in – that’s how we’re looking at it now.”