FOCUS: US Midwest aluminium premium volatility growing
The United States Midwest aluminium premium has seen a growth in volatility over the past couple of years, which only stands to increase in the coming months and years.
In an effort to better monitor the increasing volatility of the Midwest premium, American Metal Market has opted to increase the frequency of its US P1020 spot premium assessment from once per week to twice weekly effective immediately. American Metal Market’s assessment will now be held on Tuesdays and Fridays.
The spot premium reached an all-time high of 24-24.25 cents per lb in mid-January 2015 before collapsing by 65% to 8.25-8.5 cents per lb in June of that year. The premium oscillated by 30-40% between the year’s highest and lowest points in the two subsequent years. But this year, that differential shows a 79.9% gain thus far, representing a 7.55-cent-per-lb increase.
Since 2003, only once has the premium risen to the extent seen thus far this year: between November 2013 and the end of January 2014 it gained by 11.125 cents, a 114% change, hitting a peak of 20.75-21 cents per lb on January 29, 2014 before receding for most of the year.
Meanwhile, the biggest fall in the premium came in its 2015 collapse - a lapse of 15.75 cents over the course of six months.
Before the movement of the past couple of years, the premium has seen periods of quick changes followed by longer periods of stability. While the premium has recorded 40-50% changes every few years, the last movement to rival the premium’s current trajectory within a comparable amount of time was an 80.6% jump from January-March 2004 - with the premium moving from 3.75-4 cents per lb to 6.9-7.1 cents per lb.
Factors moving the premium in previous instances vary, but the premium’s stark uptick in 2018 is clearly linked to the US tariffs on primary aluminium imports into pushed by President Donald Trump. Last week, Trump announced plans to impose a 10% blanket tariff on aluminium imports, which the premium responded to by jumping nearly 20% week on week.
According to Trump’s tweets and public comments, market participants expect that the government to follow through on these tariffs despite a strong backlash rippling through US markets and political circles alike.
“The United States has been taken advantage of by countries friendly and not so friendly,” Trump said during a press conference alongside Swedish Prime Minister Stefan Löfven on March 6. During the conference, Trump reaffirmed that he believes “trade wars aren’t so bad,” and wants to reach bilateral trade deals with countries in lieu of other existing deals.
The US aluminium market does not appear to be convinced that a blanket tariff - which appears to include North American Free Trade Agreement (Nafta) partner Canada, the source of 50.4% of the nearly 4.9 million tonnes of unwrought aluminium imported by the US in 2017 - will do anything to help the US aluminium industry as a whole.
Market participants globally believe that the tariff, if implemented, will isolate the US from global trade flow, with importing countries directing their shipments to Europe instead. The effect of this would be a decline in the Rotterdam aluminium premium, while the US – left to its own domestic upstream production – would see premium surge to unknown levels.