US legislators, driven by lobbying by the domestic beer industry, are asking for the CFTC to be able to investigate and oversee price reporting agencies (PRAs) because of US aluminium consumers’ concerns about what they see as unjustifiably high premiums.
Premiums in the United States have not fallen to the degree that the beer industry expected after President Donald Trump extinguished the 10% Section 232 duties on aluminium imports from Mexico and Canada in May.
The approach by US end users differs from that of consumers in Europe, who focus on the tariffs themselves, which they argue distort the market and harm the downstream manufacturing sector. In terms of employees and value, this sector is much larger than the upstream European smelting industry.
The developments in the US are understandable in political and perhaps financial terms at a time that global trade has become more defined by protectionism and tariffs. But it seems unlikely that in this instance aluminium consumers will gather much support from US smelters or rolling mills.
Still, it is hard, albeit from a position that is inevitably shaped by the fact that I run the pricing and editorial team of a PRA, not to be slightly confounded by the apparent focus on the messenger rather than the market itself.
It is crucial to understand that regional premiums, such as are charged over the LME price for aluminium in the US Midwest, which account for a minority of the all-in price, capture not only the cost of storage, transport and insurance but also the risk that those storing and supplying this material run.
An evolving market has led the premiums that between 2009 and 2014 caused such consternation to rolling mills (who were contracted to pay the premium to buy but were then unable to pass it on themselves as a result of the terms of their downstream contracts) being passed on to their own customers. Although this is an unwelcome development for them, it should not be a surprising one.
Ultimately, premiums capture regional supply-and-demand dynamics. And the US is short of aluminium. Indeed, our analysts at Fastmarkets forecast that the deficit in aluminium in North America will actually grow this year to 2.72 million tonnes from 2.65 million tonnes in 2018.
As well, while there has been a supply response to the tariffs on imported aluminium in the US, on an annualised basis our analysts calculate that it amounts to only 90,000 tonnes.
The response of price to supply and demand is the essence of capitalist markets, as is the capacity to choose a counterparty on the basis of charges, services and terms, such as how the premium component of a material will be valued and settled.
It is probably also worth noting that, for as long as the market needs a single unit of duty-paid aluminium, no duty-free producer is ever likely to offer a single unit of aluminium on a duty-unpaid basis. To do so would be to cede commercial advantage to their rivals.
Published premiums use fair and impartial methodologies, which are open to participation from all companies buying or selling that commodity, to capture representative prices for a particular region or market.
The companies that produce those premiums, being completely independent, have no interest in whether the market moves up, down or sideways.
Large PRAs operating in the metal market, including S&P Global Platts and Fastmarkets, which provide benchmark premiums for aluminium in the US Midwest, are already independently audited in line with IOSCO and are working on complying with the new benchmark regulation in Europe.
Nor, as the paragraph above makes clear, is the market in these premiums a monopoly since several PRAs assess these prices and use clear and distinct methodologies to do so. And of course companies are not obliged to use those premiums.
That they do reflects the fact that producers and consumers of aluminium see them as an efficient and effective way of valuing their supply contracts over time.
In addition, pricing methodologies, approaches and tools evolve continually; PRAs work with the industries they serve as part of that evolution. For example, if they were so minded, aluminium consumers now have tools to hedge their premium price risk on regulated financial exchanges such as the CME.
Of course, US consumers have a right to seek legislation but they should also ensure that they give full and proper consideration to the market realities that PRAs seek to represent - and the clearly defined service that they provide in doing so.
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