Most US traders were hesitant to offer predictions about the action’s impact on the market.
Some traders anticipated little impact to the US Midwest aluminium premium, noting that the tariff was effectively replaced with a hard quota. Some were even bullish, expecting the premium to dip temporarily before trending higher.
“There could be a knee-jerk reaction, but it will probably gravitate towards 16-17 cents,” one US trader predicted.
Prior to the announcement, Fastmarkets assessed the aluminium P1020A premium, ddp Midwest US at 15-16 cents per lb on Tuesday September 15, unchanged since August 28.
When the now-revoked duties were reintroduced in August, the Midwest aluminium premium jumped significantly, rising to 16-17 cents per lb on August 7 - up by 43.5% from 11-12 cents per lb previously and up by 88.6% from the year-to-date low of 8-9.5 per lb seen between mid-May and mid-June.
A second US trader did not expect the premium to change significantly as a result of the duty removal, but thought the premium might log an initial drop.
“Everybody’s confused,” a third US trader said. “There shouldn’t be much change because, at the end of the day, it’s still restrictive. But the market needs to digest.”
Adding to the market confusion, sources were split on available supply, with some indicating that domestic inventory levels were high while others said material was scarce.
Those who suggested material was plentiful expected market participants to destock ahead of any potential premium declines - a move which could drive premiums lower.
“Some people are trying to get out of their positions,” the first US trader said.
“I think [traders] could get rid of stuff,” the third US trader said. “I think they’ll go crazy over the next few days relative to the uncertainty. Some could say: ‘Might as well take [today’s] premium.’”
A fourth trader said the tariff removal might slow an anticipated inventory drawdown, but did not expect the premium to fall by much.
“I believe the US Midwest [premium] will drop again,” a Canadian trader said.
European market cautiously optimistic
European aluminium premiums have been capped in recent weeks due to fears that excess Canadian supply would flood markets across the Atlantic, sources said. Now, some argued that an import surge was no longer a concern.
Fastmarkets assessed the aluminium P1020A premium, in-whs dp Rotterdam at $130-140 per tonne Tuesday September 15, flat from Friday September 11.
“It stops the ‘but Canadian [aluminium] will come’ argument capping Europe,” a trader in Europe said, noting, however, that doubts remain as to whether the US will import the full volume allowed under the revised regulation.
“This is bullish for Europe. There is less likelihood of the units flooding in, not that there were many shipments anyway, a producer said. “Of course, there is always the risk that if Europe looks too attractive that metal will come here – but that’s nothing to do with tariffs.”
Indeed, Rotterdam duty-paid premium forward spreads on the Chicago Mercantile Exchange have inched higher since news of the duty removal broke.
“We got a spark of people wanting to hedge their exposure, but they weren’t sure what was going on either way,” a broker in Europe said. “There is expected to be a lot of buy-side interest on the forwards from Europe.”
Timing concerns, benefit for Canada?
Before the tariff removal was announced, aluminium market participants had expected retaliatory tariffs from Canada to be announced on Tuesday. After the announcement, many were concerned about the effect the duty removal would have on contract talks.
Most market participants have opened negotiations for 2021 supply, but given the lack of clarity about whether the tariffs will be applied next year, most traders said that contract talks have paused while they try to evaluate the quota’s impact.
“The thing spooking everyone is these changes are coming out of left field. What’s next?” a fifth US trader asked.
“I think it’s better for the Canadian producers... Now they get to reap the benefits of tariff removal,” a sixth trader said
The second US trader agreed, saying: “They were already shifting units to Europe to avoid the tariff to begin with. [The Canadians] can probably easily cope with the hard quota right now.”
Still others said that the impact was likely to be minimal, noting that Canadian shipment volumes tend to decline in the last months of the year.
“From a fundamental standpoint, it doesn’t change much if you look at what would’ve come in the September through December [period],” a sixth trader said.
“[The volume limit is] probably what they would’ve shipped anyway. The headline sounds crazy, but when you start to read through it, I don’t know if it fundamentally changes things,” the fourth US trader said.
But a seventh trader was bullish, arguing instead that Canadian exporters would be unable to keep shipment volumes below the allotted total, triggering a reinstatement of the duties - and another increase in the Midwest premium.
“I think this is going to mean the market will move higher,” the seventh trader said. “It’s a very small quota.”
The surprise removal of the Section 232 tariff on US aluminium imports from Canada caught aluminium traders in North America and Europe off guard, injecting enormous uncertainty into the market and into aluminium premium outlooks.