Congress, collusion and can sheet | Hotter Commodities

Major aluminium producers Alcoa, Rio Tinto and Century Aluminum have been accused of pocketing vast sums of money from the sale of aluminium products to the beverage industry in the US at inflated prices – and of potentially colluding to do so

That is quite an allegation against some of the biggest names in the aluminium industry, and one worthy of a closer look.

The charge, made by Representative Ken Buck from the state of Colorado, is that these three companies, along with other producers, have been including a tariff in the aluminium sale price despite the products being exempt from duties.

“The unwillingness of aluminium producers – including Alcoa, Rio Tinto and Century Aluminum, among others – to offer duty-free aluminium not only results in unjustified windfall payments but is also highly suggestive of anti-competitive price collusion,” Buck alleged in a letter to US Assistant Attorney General Jonathan Kantor.

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His solution is to amend the False Claims Act so that parties are subject to liability if they incorrectly collect monies they claim are owed – such as tariffs – without transferring the amount to the government.

He is also seeking to increase transparency in and oversight of the US Midwest premium, which he alleges is manipulated.

Buck has made variations of these claims before, but had never publicly named the aluminium market participants he was referring to.

Logistics

According to Buck, the US Midwest premium has, for no apparent market-based reason, recently undergone sharp price spikes and swings.

Describing these as unusual price fluctuations, Buck alleged that they occurred despite the logistical costs of sourcing metal from around the world – including transportation and storage – having undergone minimal changes.

The letter does not mention the hefty 200% duty of Russian aluminium imports into the US, nor the sanctions in the UK and the fear that the EU could follow suit with its own set of sanctions on primary metal later this month.

It also does not mention the displacement of shipments in the Baltic and Black Seas due to Russia’s war in Ukraine, nor the disruptions to aluminium coming from the Middle East, India and Asia via the Suez Canal amid the tensions in the Red Sea.

The Baltic Dry Index (BDI) – a composite of the dry bulk time charter averages – is a decent measure of freight rates for commodities like aluminium, although it obviously does not tell the whole story. It is often viewed as a leading indicator of economic activity because changes in the index reflect supply and demand for important materials used in manufacturing.

The BDI tracks the US Midwest premium pretty well, reflecting the macro-economic backdrop.

For example, the BDI’s peak at an all-time high in October 2021 amid post-Covid supply disruptions coincided with the peak that same year for the US Midwest premium, at 34.75-36.00 cents per lb, followed by a steady decline for both.

The BDI’s high for 2022 was in May, coinciding with the peak for the US Midwest premium at 39.75-40.25 cents per lb, followed by a subsequent decline by both.

Fundamental supply-demand factors are at work too, of course.

Looking further back, the US Midwest premium started 2018 at 9.40-9.50 cents per lb and peaked at 22.00-23.00 cents per lb in early April of that year, when the US government implemented Section 232 duties on aluminium imports into the US and then sanctioned Russian producer UC Rusal.

The premium tracked lower for two years, returning to pre-tariff levels, before peaking at 39.00-41.00 cents per lb in April 2022 amid global market concerns about the worsening of the Covid-19 situation in China.

The US Midwest premium has moved lower since.

Fastmarkets – an independent price-reporting agency that has no vested interest in whether the price of a commodity it covers moves up or down – assessed the aluminium P1020A premium, ddp Midwest US at 18.25-19.25 cents per lb on Wednesday February 7, down by 0.69% from 18.50-19.25 cents per lb a week earlier.

Cost pressures

Logistical issues aside, the aluminium market is also facing the ongoing challenge of inflationary cost pressures, including on labor and raw materials. Those costs ebb and flow and feed through into premiums.

Key smelting costs include alumina, which accounts for around a third of the cost of smelting. For example, a $10 per tonne move in alumina prices is expected to have a $43 million impact on Alcoa’s aluminium smelting costs in 2024, the company noted in its most recent quarterly report.

The annual cost sensitivity impact of a $10 per tonne move in alumina on Rio Tinto’s underlying earnings before interest, taxes, depreciation and amortization (EBITDA) was $60 million in 2023, the company noted in its 2023 production report.

Just of late, delays in shipping bauxite from Guinea and China’s raw material shortage, along with the news that Alcoa will curtail production at its Kwinana alumina refinery in the second quarter of 2024, have boosted alumina prices.

Fastmarkets’ alumina index, fob Australia started the year at $348.54 per tonne and is now at $365.08 per tonne, as of February 7.

Another key cost is energy. Producers around the world have over the past several decades been forced to temporarily curtail, and often permanently close, production capacity amid high energy prices.

More than 1 million tonnes of European aluminium capacity has been curtailed in the past couple of years alone, while the US is down to just four smelters – Alcoa’s plants in Massena, New York and Warrick, Indiana, and Century Aluminum’s smelters in Mount Holly, South Carolina and Sebree, Kentucky.

There are uncertainties around Mount Holly and Sebree, however, with both plants required to meet ISO requirements by May 1, otherwise they will lose the right for their products to be warranted as London Metal Exchange brands.

A Century Aluminum spokesperson told Fastmarkets that the company plans to resolve the situation in the next few months to prevent this from happening.

The three companies named by Buck produce more than 6 million tonnes of aluminium annually from smelters around the world.

Windfall payments for aluminium producers

If aluminium producers have been seeing windfall payments, that is not being reflected in their earnings.

Alcoa reported a net loss of $651 million for 2023, deepening its $123 million net loss reported in 2022.

Rio Tinto has not yet released its 2023 results, but its net earnings – which include other divisions including iron ore and copper – dropped by 43% in the first half of that year, and its aluminium EBITDA fell by 60% over the same period.

Century Aluminum – which is also yet to release its 2023 results – most recently reported an adjusted net loss of $13.8 million for the third quarter of 2023, a $29.3 million decrease sequentially.

For sure, producers like Alcoa and Rio Tinto are working to secure a green premium for their products, based on their low-carbon nature.

But the practice is nascent and not widely adopted by consumers at the moment.

Fastmarkets assessed both aluminium low-carbon differential P1020A, US Midwest and aluminium low-carbon differential for value-added product, US Midwest at zero on Friday February 2, with low-carbon units commanding the same pricing as non-low-carbon units.

Meanwhile, the aluminium low-carbon differential P1020A, Europe was assessed at $10.00-25.00 per tonne on Friday.

It will likely take some time before the environmental, social and governance (ESG) credentials of producing aluminium filter through to pricing more widely.

Section 232 tariffs for aluminium imports

Buck’s allegation – that producers are potentially engaging in anti-competitive price collusion – largely relates to Section 232 tariffs, imposed on imports of aluminium into the US in 2018.

Starting in 2019, the US government began to repeal tariffs on certain nations, including Canada. In addition, domestically recycled scrap aluminium – which is estimated to be the source of more than 70% of can sheet in the US – is not subject to Section 232 tariffs.

That has not stopped aluminium producers from including the duties in their sales price, Buck’s letter alleges.

But the Aluminium Association – which counts Alcoa and Rio Tinto as members – told Fastmarkets in a statement that aluminium pricing in the US is already overseen by the Commodity Futures Trading Commission (CFTC), which has indicated that they have not seen any signs of market irregularities.

According to beverage end users, the US Midwest premium is calculated so that aluminium end users ultimately pay a tariff-laden cost regardless of the country of origin or the amount of recycled content used.

Brian Crawford, president and chief executive officer of the Beer Institute, said the US Midwest premium has evolved into a black box that artificially drives up the price of aluminium for end users.

The answer, end users claim, is to empower federal regulators to increase oversight of how the US Midwest premium is benchmarked. That, they argue, would increase competition and transparency in US aluminium markets.

But the proposed legislative solution – overseeing and investigating price setting and reporting entities in the aluminium market – is not going to push the premium lower.

Consumers certainly often find that costs are passed down the supply chain, with the main choice being to wear them or pass them onto the ultimate consumer on the street, such as the beer or soda drinker.

It is also true that there are challenges to pricing the Midwest aluminium market, such as the high number of trading hubs, the geographic scattering of consumers and the array of ways people transport metal.

But accusing producers of colluding to inflate prices and fraudulently collect money owed to the federal government? That seems to be a step too far.

In Hotter Commodities, special correspondent Andrea Hotter covers some of the biggest stories impacting the natural resources sector. Sign up today to receive Andrea’s content as it is published.

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