Section 232 report isolating US from global aluminium flow [UPDATED]
The proposed Section 232 investigation remedies by the United States Commerce Department are becoming apparent in the global market, with the common theme a reorganization of the world’s supply chains to remove the US from the trade flow.
One of the biggest question marks in North America related to the Section 232 recommendations is what any of them - if implemented - will mean for shipments of Canadian aluminium.
Canada delivered 2.46 million tonnes of unwrought aluminium to the US last year, accounting for 50.4% of all US imports under the 7601 HTS code. By comparison, Russia - the next-largest supplier - shipped 693,126 tonnes, representing only 14.2% of total imports of the product for the year.
Canada is part of the North American Free Trade Agreement (Nafta), which creates a duty-free trade bloc between the three countries. Under this agreement, Canada is able to send its aluminium from smelters such as Rio Tinto Plc’s Kitimat in British Columbia to cover for a natural shortage of primary aluminium in the US.
But the full 232 report submitted to US President Donald Trump does not make any allowance for excluding either Nafta partner from any tariffs and quotas, which could prompt companies that have been shipping material to the US to seek other markets that would offer less onerous conditions.
The main candidate for this would be Rio Tinto, and the Kitimat smelter in particular. Kitimat currently sends 80% of the 420,000 tonnes per year of aluminium produced at the plant to the US market, according to one company executive. The US has been the target for swing units from Kitimat, with its other option the Asian Pacific market.
With the European Union-Canada Comprehensive Economic and Trade Agreement (CETA) in place, it may become more feasible for Rio Tinto to send its metal to Europe. The result of this shift in material would be a decrease in European metal premiums and an increase in US premiums.
But Canadian metal going overseas puts US consumers in an unfavorable position.
“We think it would take the US aluminium industry several years to get back on its feet, even with the help of the proposed import tariffs, and ready to more fully supply domestic needs from internal sources,” Yang Cao, a senior analyst at Metal Bulletin Research, said.
If the US imposes a blanket tariff or quotas, including Nafta partners, then the most likely paths for Canadian metal to travel would be for aluminium that is smelted in Quebec to be shipped to Europe, while primary metal produced at Kitimat would be shipped to the Asian Pacific region, according to Lloyd O’Carroll, an independent metal analyst.
But excluding Canada from shipping metal to the US does not make sense, O’Carroll told American Metal Market on Thursday February 22: “Canada has to be excluded from the regulations in order to be logical.”
Aluminium premiums are already starting to rise following the publicizing of Commerce’s recommendations last week, with Midwest premium futures on the CME climbing to 16.5 cents per lb for March 2018 and 16.7 cents for July, according to CME data as of February 22. By comparison, futures for February 2018 were at 14.5 cents per lb.
American Metal Market’s latest assessment places the Midwest aluminium premium at 14-14.25 cents per lb, up 49.5% since the start of the year.
Europe might find itself the destination of choice for metal that would have otherwise entered the US if Trump’s Section 232 decision leads to tariffs that create a barrier to entry by making it too cost prohibitive.
Producers in countries that have been favoring the US for its higher premiums - Russia and the Middle East specifically, which constituted 33.3% of US total imports of unwrought aluminium in 2017 - would probably opt to redirect their metal to Europe if the US were to institute either a blanket tariff on imports or a mix of tariffs and quotas.
In particular, traders in Europe are worried about the recommended remedy of levying a 23.6% tariff on shipments from select nations, including Russia, China, Vietnam, Hong Kong and Venezuela. Such a remedy would cause the redirection of those shipments to Europe, they believe.
“Each of the three options, you could argue [number] two is probably the worst for Europe,” one trader told Metal Bulletin. “Russia stops going to the US and starts flooding Europe.”
Additionally, Italian market participants say they are concerned that South American aluminium might start to arrive in southern Europe, particularly from Venezuela and Brazil, that would otherwise go to the US.
Such a redirection is not a foregone conclusion, though, and Europe does not appear to be ignoring the threat of being flooded with imports.
Responding to the steel iteration of the Section 232, European steel association Eurofer said the EU will respond with its own restrictive tariffs - essentially entering into a trade war with the US - if Trump follows through with any across-the-board tariffs and quotas.
If more metal starts to hit European shores, it could easily pressure European aluminium premiums lower. Metal Bulletin’s benchmark duty-unpaid spot in-warehouse Rotterdam premium has risen by 8.4% since the start of the year and is up by 47.9% from the 2017 average low of $70 per tonne.
According to market participants globally, tariffs and quotas will cause the US Midwest premium to disconnect from the rest of the world, while the higher levels of aluminium shipped to Europe could cause the Rotterdam premium to be the main mover of premiums globally.
Although Chinese authorities were quick to respond to Commerce’s announcement, calling the Section 232 “groundless” and assuring onlookers that a trade war would certainly occur if the 232 were implemented, the timing of Commerce’s announcement coincides with the Chinese New Year holiday - making it tougher to gauge the Asian reaction to the 232 recommendations.
China is not a large source of primary aluminium shipments to the US since the Asian country has a 15% tax on primary aluminium exports. But China is a source of semi-fabricated aluminium, originating from either China or other Asian countries, which is one major aspect of the Section 232 probe.
“Apart from [the] US, which was the largest destination of Chinese semis export, Chinese exports of semis were mainly to Southeast Asia, such as Vietnam, Thailand and South Korea,” Cao said. “So if Chinese exports cannot go to the US any more, the place with least resistance will be Southeast Asia.”
Meanwhile, even with a reshuffling of where metal is shipped, Japan - the biggest importer of primary metal in Asia - will remain a popular destination for aluminium.
“If the duty is 7%, it doesn’t mean Asia premiums will rise by 7%. If Canadian units are not coming any more and Australian [metal] not coming, then maybe there will be more Russian units in Asia and Middle Eastern units in Asia,” an Asian trader told Metal Bulletin, calling the change “a reshuffling of units.”
“[Producers such as Rio Tinto Plc] may not bring all metal to Japan so there could be some changes to the type of metal that comes here,” a second trader added.
Asian premiums, such as the main Japanese ports (MJP) premium, are strongly linked to the movement of the US Midwest premium. In the near term, rising US premiums are likely to support Asian premiums, with swing tonnages making their way to the US.
But if the 232 results in tariffs and quotas, the MJP rate might disconnect from the US premium and premiums might no longer have that support since European premiums are also expected to fall.
But the MJP will retain a link to the US Midwest, even if a 232 decision causes it to shoot up, some market participants in the region believe.
“The relationship will stay,” a third Asian trader predicted. “If tomorrow too much stock is n Asia and if they can’t get to the US then the MJP [premium] can go down and US [premiums] will go up. If it’s too cheap [in Asia], people will ship to the US.”
Following Commerce’s announcement of its 232 recommendations, Brazilian buyers told Metal Bulletin that the expected increase in the US Midwest premium could cause those buyers to push for a renegotiation of their supply contracts.
Instead, the Brazilian premium could start to become more aligned with the Rotterdam premium, which according to one seller would link the Brazilian premium to “a global pool.”
Should this happen, combined with the increase of aluminium shipments directed to European destinations, the Brazilian premiums could weaken in correlation with a decline in the Rotterdam premium.
Market observers expect Venezuelan and Brazilian metal in particular to make its way to southern Europe if the US implements tariffs and quotas.
Metal Bulletin’s most recent assessment of the P1020 cif Brazilian main ports duty-unpaid spot premium was $170-180 per tonne.
This article was updated at 15:41 GMT on February 23 to include more feedback from Asian market participants. Justin Yang in London and Shivani Singh in Singapore contributed to this article.