FORECAST: US aluminium import tariffs short-term bullish, long-term bearish for Asian premiums - sources
The imposition of import tariffs and/or quotas by the US government on aluminium and aluminium products could push Asian premiums up in the short term but drive them down in the long term, market participants said.
US Secretary of Commerce Wilbur Ross on Friday February 16 recommended a series of tariffs and/or quotas in addition to existing duties in place on aluminium and steel imports following the department’s Section 232 investigations into imports of the products.
US President Trump is required to make a decision on the recommendations by April 19.
“It is hard to quantify the impact on Asian premiums in the next one to two weeks, or at least until the market returns from [Chinese New Year] holidays. But there could be a knee-jerk response in the near term. If US premiums rise, Asia premiums will climb too,” a Singapore-based trader suggested.
Aluminium premiums in Asia are largely unchanged this week, with spot trading remaining slow due to the continued holiday-related absence of some industry participants. Metal Bulletin assessed the South Korean P1020 premium at $98-120 per tonne on February 20, unchanged from last week.
US aluminium premiums will rise should the US impose import tariffs and quotas on aluminium and aluminium products, market observers agree.
American Metal Market’s assessment of the P1020 premium has been rising since before Ross delivered his recommendations to the White House. The assessment on February 13 at 13-13.5 cents per lb marked an upswing of more than 40% since the start of the year.
Higher US aluminium premiums could see producers divert supply to the US, reducing supply to Asia and hence provide support for Asia premiums, a second Singapore-based trader said.
“If US premiums increase… swing tonnages will go to the US, which can lead to supply pressures in Asia,” he said.
Backwardation in foreground
But the near-term outlook for premiums in Asia is also complicated by the backwardation in nearby London Metal Exchange aluminium spreads, which could put downward pressure on premiums in the region if it persists, industry sources noted.
“The backwardation is a tough situation for traders. If the backwardation continues for another half month or longer, premiums will decrease. If the backwardation is sustained till mid-March, it could even affect Q2 MJP premiums,” a third Singapore-based trader said.
The backwardation in the February/March 2018 spread has sparked huge deliveries of the metal into LME-listed warehouses. On February 13, some 166,225 tonnes were delivered into LME system - the largest single delivery of aluminium into LME warehouses since March 19, 2014.
These deliveries briefly swung spreads back into contango but the cash/three-month spread then returned to a huge backwardation of $50 per tonne today, while the March/April 2018 spread is at a narrow contango of $0.25 per tonne.
Talks between global aluminium producers and Japanese buyers for second-quarter aluminium supply to main Japanese ports (MJP) are set to start soon, with one producer already offering $135 per tonne to some buyers in Japan.
Rising US and European aluminium premiums and expectations of strong demand during the second quarter are likely to raise the second-quarter premium from the first-quarter settlement of $103 per tonne cif.
But the backwardation is likely to cap the upside for the second-quarter MJP premium, traders have noted.
“Some material won’t be leaving the US now [due to expected higher US premiums from import tariffs]. Canada is already exporting less to Southeast Asia and Korea. Producers will latch on to [the reasons that US premiums are rising] to support their Q2 MJP offers,” the second Singapore trader said.
“But with the backwardation, traders won’t accept high premiums. Q2 MJP should increase but not significantly. $10 could be the maximum.”
Smelters will use the argument of good demand in Japan, the US and Europe to keep the second-quarter MJP premium elevated, a Korea-based trader said.
“But if the backwardation still exists in March, I don’t think the final premium can go up to $135,” he added.
In the mid-to-long term, market participants expect a more bearish impact on Asia aluminium premiums should the US impose import tariffs and/or quotas on the metal.
“If the US increases import tariffs on aluminium imports, China’s export of coils and products to the US will have to stop,” a second Korea-based trader said.
Should these products be redirected to Asia, it would put downward pressure on premiums in the region, he added - especially in Korea and Southeast Asia.
Offers in the region for Chinese aluminium products such as coil and plate - some of which are used as substitutes for P1020 ingots - have risen in recent months while the export arbitrage window in China has been open.
South Korea’s imports of aluminium plate, sheet and strip from China jumped 57.1% to 177,015 tonnes in 2017. In December alone, imports from China grew 47.8% year on year to 13,278 tonnes.
Traders in Southeast Asia said earlier this month that they had received offers for Chinese aluminium plates that can be used as primary aluminium.
“If Chinese exports can’t go to the US, it will go somewhere else and the place with least resistance is Southeast Asia. Expectations of import tariffs in the US is also why the coil export chatter has been getting louder recently,” the second Singapore trader said.
Since Japanese buyers are unlikely to opt for Chinese coils as a replacement for P1020 ingots, local premiums are less likely to come under pressure, sources said.
Japan imported only 10,334 tonnes of aluminium plates, sheets and strips from China in 2017, Japanese customs data showed.
The spot cif MJP premium was unchanged week on week at $95-110 per tonne on February 20, according to Metal Bulletin’s assessment.
China’s exports of unwrought aluminium and aluminium products rose 4.5% to 4.79 million tonnes in 2017. In January this year, exports rose for a third consecutive month - they were up 14.3% year on year at 445,000 tonnes.