Mexican tariffs said to already be affecting aluminium supply chain and premiums

The new tariffs on aluminium imports imposed by Mexico are affecting the light metal's supply chain, trade flows and premiums, sources told Fastmarkets during the week to Friday May 3

“The entire supply chain of the light metal is being impacted, with premiums rising, including in the United States,” Fernando Garcia Martinez, vice president of operations at Mexican aluminium institute IMEDAL, told Fastmarkets this week.

Fastmarkets’ daily assessment of the aluminium P1020A premium, ddp Midwest US was at $19.50-22.00 cents per lb on Friday. The premium had risen by 3.70% on Thursday May 2, to $20.00-22.00 cents per lb from $19.00-21.50 cents per lb on May 1. 

Companies in sectors such as auto parts, air conditioning and extrusions are closing doors temporarily, according to Garcia Martinez. The auto parts sector in particular could be heavily punished by automakers if they don’t deliver volumes under signed contracts. 

“We are in contact with authorities to reach a solution,” he said. “This was not negotiated properly and is a result of intense US pressure [for trade monitoring in Mexico]. The announcement was completely unexpected and surprised everyone. It left the industry in shock.”

US imports from Mexico are exempt from Section 232 tariffs due to a side agreement among the United States-Mexico-Canada Agreement (USMCA) countries. However, Mexico needs to implement stricter monitoring measures and improve its trade data reporting under the USMCA side agreement. 

Mexico decided to increase its import duties on several goods, according to a decree published on April 22. Aluminium was included, with new tariffs on the light metal in a range of 20-35%. 

The new tariffs – which vary from 5% to 50% for products including paper, steel and others – aim to “provide certainty and fair market conditions to the sectors of the national industry that face situations of vulnerability, derived from practices that alter and affect international trade,” according to the decree. 

Additionally, the document says that “the proposed measure is in accordance with international law, as the importation of goods from the countries with which Mexico has concluded a trade treaty, if the requirements established therein are met, will be carried out under preferential tariff treatment.”

Textiles, clothing, footwear, wood, plastic and its manufactures, chemical products, paper and cardboard, ceramic products, glass and its manufactures, electrical equipment, transport equipment, musical instruments and furniture are also subject to the tariffs.

Issues with subsidization of Chinese aluminium products

The tariff announcement was welcomed by the US Aluminum Association, based in Washington. Association president Charles Johnson said on April 23 that the state subsidization of Chinese aluminium products has been an issue for imports from that country, and the US has been taking action in this regard through anti-dumping and countervailing duties. 

“We have seen state-subsidized metal from China flow through other markets, including the Mexican market,” said Johnson, who added that imports of subsidized Chinese aluminium to Mexico caused Mexican manufacturers to be priced out of their own market and to turn to markets in the US, “using Chinese or Russian metal as an input at an unfair advantage,” he said. This also restricted US access to the Mexican market, Johnson said.

On the other hand, García Martínez noted that the US complains that aluminium imports from Mexico have grown substantially, but the truth is, Mexico’s market share is only about 1%. “That’s inexpressive,” he told Fastmarkets.

Another complaint from IMEDAL was tied to the trade monitoring system Mexico was supposed to have under Section 232. This was reiterated in USMCA negotiations to ensure swift action in the event of trade flow surges.

“This hasn’t been enforced properly since 2020 due to a confidentiality law in the country,” the IMEDAL vice president said “There is no official, reliable source of trade data in Mexico that can be accessed by the general public. It is chaos.”

“It’s extremely important for the Mexican government to act swiftly to reestablish the monitoring system,” he said.

On April 25, IMEDAL issued a statement requesting that the Mexican government not implement the tariffs on aluminium, mainly the 35% duty for unalloyed aluminium (ingot) and the 20% duty for alloyed aluminium (billet and primary foundry alloy, for example). 

The institute mentioned severe consequences, such as loss of competitiveness in Mexican industry and higher prices for end consumers that could stem from the new duties. One of the key reasons, IMEDAL said, was the fact that Mexico does not produce primary aluminium and that its free trade agreements (FTAs) with the US and Canada would not suffice.

“The joint production capacity of the United States and Canada is insufficient to cover the demand of the three countries, since only 4 million tonnes are produced [in the region], while [total] demand is 6 million tonnes. It is worth mentioning that these new tariffs open the possibility for prices to go up, as they come only for these countries,” the April 25 statement said. IMEDAL also highlights that this could affect the whole chain, such as appliances, construction and automobiles. 

The new tariffs might be a politically motivated move, with general elections in Mexico scheduled to be held on June 2, according to Fastmarkets analyst Andy Farida

“So [there is an] impact on trade flows for sure, but not sure by how much,” Farida said. “Perhaps the consumers have to find a new supplier and pay more. [Regarding] premiums, the Midwest is very insulated, but if things get expensive, I think higher premiums can be seen over the next few months.”

Market reaction

Market participants in general seemed “lost” regarding the new tariffs, because they were not expecting them. Also, there has been a lot of speculation surrounding the IMMEX program rules, and whether buyers will have to pay any tariffs and how much the duties will impact trade flows.

The IMMEX program, formally known as the IMMEX maquiladora program, allows foreign manufacturers to export raw materials and components into Mexico, tax and duty free, under the condition that 100% of all finished goods will be exported out of Mexico within a government-mandated time frame, according to the North American Production Sharing website. Maquiladoras are factories in Mexico that are owned and run by a foreign company. They manufacture the company’s products in Mexico, then export the finished goods to other countries.

A US trader told Fastmarkets that they were left in the dark regarding Mexican tariffs. “We are waiting for some interpretation. Even companies in Mexico do not understand the tariffs. The IMMEX program may affect the situation,” they said. 

Said Garcia Martinez: “There has been confusion regarding the application of IMMEX and other programs. In the case of IMMEX, the import duty could be deferred, but it would be paid when exporting the material, especially if that goes into the US, because of Section 232. The vast majority of Mexican exports are to the US.”

One European trader noted that “What I initially perceived as a big trading opportunity may turn out to be not quite so good. It’s really a matter of understanding who falls under the scope of IMMEX before we can get carried away, and we certainly don’t see the news being priced into the market yet.”

And a second European trader said, “Everyone is focused on finding out more information right now. It’s about finding out what stocks are already on the ground, which end users might be duty-exempt, etc., because it’s very difficult to trade before you have clarity on these aspects.”

An aluminium trader in Canada said that the Mexican tariffs came out of the blue.

“It’s terrible, because Mexico does not produce primary aluminum. It could affect the Midwest – it already started to rise a little. There are many doubts about how this tax will be calculated. And it’s election season, so we don’t know how long it will last,” he said, adding that he does not see a large movement of exports to Mexico from Europe – only if they were from plants that didn’t export before. “Mexico will look for alternatives other than the USA, such as Malaysia, Venezuela, South Africa, Vietnam and Australia,” he added. 

A US aluminium trader told Fastmarkets that everybody is complaining due to the size of the tariffs.

“Maybe Canadians will try to export more to Mexico, but I know it’s pretty hard for Mexicans to trust new people,” this trader said. “I don’t see Venezuela being a market for Mexico, maybe Malaysia or South Africa. But I don’t see Mexico looking for new suppliers at all – probably they will stick mainly with the USA.”

Meanwhile, a Brazilian trader noted that it is unclear how the tariffs will be implemented.

“A Mexican friend who has a prominent position in the industry said that this new tax will only generate inflation in the USA. Business between the US and Mexico will continue to exist, but the price will rise through taxes,” the Brazilian trader said. 

García Martínez said that Mexico has FTAs with Europe – but that region is in deficit and could not supply enough aluminium – as well as the Trans-Pacific Partnership, which includes Vietnam, Malaysia and Australia. 

Mexico has not had an FTA with Venezuela since 2006.

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