With tariffs causing both economic uncertainty and higher aluminium premiums for the US, the North American aluminium industry has been questioning the possibility of demand destruction for the metal, according to industry participants.Alcoa president and chief executive office Bill Oplinger, while saying he was not speaking for the industry as a whole, believes that, if persistent, the high price of aluminium in the US could result “in demand destruction, which ultimately will hurt the industry in the United States” the CEO said during Aluminum Association’s spring conference, adding that this hasn’t yet become a reality and that Alcoa’s order books have been strong.
“Demand destruction is now the talk of town” among some industry participants, who have touched upon it subtly during calls, with mentions of softer orderbooks, renegotiations of deal terms, and talk of customers delaying projects, Fastmarkets analyst Andy Farida said.
Economic outlook and the role of US tariffs
One way tariffs are causing concern for the industry is by creating a possibly unfavorable outlook for the US economy, Fastmarkets understands.
The International Monetary Fund (IMF) wrote in its April World Economic Outlook report that it now expects growth in the US to slow to 1.8%, with tariffs and counter-tariffs playing an instrumental role in this slow-down.
“[High tariffs] on its own is a major negative shock to growth. The unpredictability with which these measures have been unfolding also has a negative impact on economic activity and the outlook and, at the same time, makes it more difficult than usual to make assumptions that would constitute a basis for an internally consistent and timely set of projections,” the IMF said.
The temporary trade agreement between the US and China announced on Monday May 12 brought some optimism back into the markets, boosting the outlook and stock prices in the country.
“The surprisingly large reduction in mutual tariffs between China and the US announced early Monday morning has sent the markets flying,” wrote Professor Jeremy Siegel, senior economist to WisdomTree and emeritus professor of finance at The Wharton School of the University of Pennsylvania, in his weekly WisdomTree note on Monday.
“The tariffs themselves are a wildcard. Firms will eventually adjust to whatever tariff level prevails, but there’s a natural lag,” he added.
Farida said: “A ceasefire in US-China trade war is far more likely to bring back business confidence to invest and should see improved demand outlook given that goods coming from China are no longer under the threat of a triple-digit tariff. This is of course a general take and not aluminium specific.”
Its effect on the aluminium market will be far more subtle, according to Farida.
“A US-China trade deal is now a useful template and implied that Trump is willing to do a deal even with his biggest adversaries. This should give Canada and Mexico some sort of optimism that the 25% tariffs on aluminium and steel could be negotiated lower too,” Farida said, who expects the Midwest aluminium premium to decrease once the US, Canada and Mexico define a trade deal.
“We could then see Canadian units flowing back into the US,” he said.
High premium challenges in the US aluminium market
The US aluminium industry is also concerned about how much of the higher price of aluminium can be passed on to the end consumer, with the Midwest premium having increased substantially due to tariffs because the US receives more than two-thirds of its primary aluminium from Canada.
The aluminium P1020A premium, ddp Midwest US was assessed at 39-41 cents per lb on Wednesday May 14, equivalent to $859.80-903.90 per tonne, much higher than the Fastmarkets’ aluminium P1020A premium, in-whs dp Rotterdam, which was assessed at $180-215 per tonne on Tuesday May 13.
“The end-consumer is not that sensitive to aluminium prices. It is not like he will say ‘I won’t drink beer anymore because the beer can is two cents more expensive,’” a US-based trader said.
The trader added that larger ticket items, such as automobiles or construction, could be affected more due to a negative economic outlook or high unemployment so the industry will likely see a secondary effect.
Another way the high premium in the US could affect the industry is by attracting supply into the US, which will then put a downward pressure on the premium, according to Farida.
A possible trade deal between the US and Canada could bring the premium down, however, it is unlikely to go fall below 2024 lows, he said, adding: “This is because once higher prices hit the market, it will take time to come down.”
“But my point here is, at the current elevated level of around 40 cents pet lb, it is unsustainable and will only accelerate the process of achieving total demand destruction,” Farida said.
Medium and long-term outlook for aluminium demand
While short-term outlook is questionable, the medium-term outlook for the metal is much better, according to Farida.
“Demand should improve in the medium term, with pent up demand which was supposed to be concluded in the late first quarter of this year re-emerging once more trade deals are announced. This is with the caveat that Trump rolls back on his aggressive tariff stance, which would bring back some form of normality so business flow can return,” he said.
Farida is neither bullish nor bearish for aluminium demand in the US in the long-term.
“Tariffs are inflationary and so, higher prices are more likely to stick a lot longer. That could force consumers to choose between the need to have aluminium goods and high-end ticket items goods which they can ditch,” he said.
It is highly likely that higher domestic prices caused by the tariffs will linger, however, the administration could hope that the US Federal Reserve Bank will “cut rates to support the current anemic demand backdrop and lower dollar index should help US exports over the coming months,” he added.
The Fed will need to be flexible, given the “growing list of warning signs: deteriorating supply chains and uncertainty with an unresolved tariff standoff,” according to Professor Siegel.
He sees the long-term inflation expectations as in the 5-year/5-year forward inflation rate currently hovering near 2.06%, suggesting upside inflation risks are not entrenched, Professor Seigel said.
Further down, aluminium demand is expected to increase, driven by the energy transition and manufacturing.
“With the growth of clean energy infrastructure, electric vehicles, and domestic manufacturing, aluminium is more important than ever,” Annie Sartor, aluminium campaign manager for climate non-profit Industrious Labs told Fastmarkets.
In their “The Aluminum Rush: Forecast Demand for Critical Metal” report released on April 8, Industrious Labs forecasts that domestic demand for primary aluminium could increase as much as 40% by 2035, with an average projected demand increase of 13.33%.
“Meeting this demand will require immediate strategic action, such as expanding domestic production, restarting curtailed smelters, or exploring new sourcing options,” according to the report.
However, expanding domestic production and restarting curtailed smelter has been challenged by the high price of electricity in the country.
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