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U.S.-Canada truce but aluminium is ever more politicised: Andy Home

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09/17/2020 | 10:00pm EDT

(Repeats from Thursday. The opinions expressed here are those of the author, a columnist for Reuters.)

* Politics and the U.S. aluminium price: https://tmsnrt.rs/2FHMmQP

LONDON, Sept 17 (Reuters) - The United States has had another change of heart about how to deal with aluminium imports from its neighbour and largest supplier Canada.

The 10% tariff that was re-imposed on unalloyed primary metal last month will now be lifted.

Cue a collective sigh of relief from U.S. users facing another sharp rise in local premiums.

But there's a catch.

The United States has made its peace gesture conditional on how much metal flows over the border in the last four months of this year. Too much and the tariffs come back.

These are unilateral quotas. Canada is clear that it hasn't negotiated them.

The U.S.-Canada border is going to remain a contested zone for the aluminium market with politics a bigger price driver than physical supply and demand for regional premiums.

This is part of a broader trend of protectionist politics reaching ever deeper into the global aluminium supply chain.

BORDER CLASH

This U.S.-Canadian aluminium drama has been playing out ever since March 2018, when the Trump administration first imposed tariffs on all imports of aluminium.

Canada was initially exempted. Then it wasn't. Then it was again in May 2019. Last month the tariffs were back on after a much-disputed statistical "surge" of Canadian imports earlier this year. Now they're off again.

Confused?

So too is the local aluminium price in the form of the U.S. Midwest premium assessed by S&P Global Platts.

The indexed CME contract has been a roller-coaster over recent months as the market tries to second-guess Trumpian politics.

That political volatility isn't going to abate.

The Office of the U.S. Trade Representative (USTR) has made tariff exemptions contingent on Canadian imports not exceeding 83,000 tonnes in September and November and 70,000 tonnes in October and December.

This follows consultations with the Canadian government and an assessment that imports of unalloyed primary metal will naturally trend lower over the period relative to the first part of the year.

It is a tacit acceptance that the early-2020 "surge" was largely down to the hit on demand from COVID-19 lockdowns in the automotive and aerospace sectors. Smelters responded by producing more "commodity-grade" metal which comes with the advantage of potential delivery to the London Metal Exchange (LME).

Cross-border trade in this form of aluminium "is likely to normalize in the last four months of 2020", according to the USTR.

If it doesn't, the tariffs came back.

Ominously, this seems to be an open-ended threat.

"The United States will consult with the Canadian government at the end of the year to review the state of the aluminum trade in light of trade patterns during the four-month period and expected market conditions in 2021," the USTR said.

A truce then. But no lasting peace.

BUILDING NEW BORDERS

Aluminium trade borders are proliferating as a failure to achieve a consensus on how to tackle Chinese exports translates into the erection of national barriers.

Anti-dumping measures have already been imposed or are under consideration in the United States, Canada, Europe, Australia, Argentina and India.

Indeed, India is considering going further and placing both aluminium and copper on a list of restricted imports. It is working on an initial registration and monitoring system "to have adequate information (...) so that an appropriate policy intervention could be devised," the mines ministry said.

China is one of India's largest suppliers and there is a danger that aluminium will be wrapped into the broader, troubled political and trade relations between the two countries.

Most of these trade walls are being erected in the downstream aluminium products sector, not surprisingly since this is the form that Chinese exports have historically taken.

But the U.S.-Canada border clash is threatening to evolve into a longer-term barrier in the primary metal arena, albeit one that, like Schrodinger's Cat, can be simultaneously there and not there depending on which way the political wind is blowing in Washington.

Europe already has an aluminium trade wall in the form of import duties ranging from 3% to 6% but carbon borders are also coming.

What the European Union calls a "carbon border adjustment mechanism" is planned for next year. Imports of aluminium produced from high-carbon energy such as coal or gas will require the purchase of carbon allowances.

Whether the carbon border simply replaces the existing duty structure or supplements it remains to be seen.

But even on its own it could translate into an initial "green" premium of $180 to $240 per tonne, according to Citi analyst Tracy Liao.

Ultimately, though, the form of the new aluminium border and the resulting premium will be determined first and foremost by politicians such as Ursula von der Leyen, head of the European Commission, who is calling for a doubling-down on carbon emission targets.

POLITICAL PREMIUMS

As U.S. aluminium buyers have found out, political turbulence can quickly translate into pricing turbulence.

The battle-ground is not the LME, which reflects the global price, but the North American premium. The same is likely to be true of the fast-changing European landscape, where the emergence of a "green" premium could generate a matrix of potential local price drivers.

These localised risks can now be hedged on the CME, which has four regional aluminium premium contracts, including both duty-unpaid and duty-paid European products.

Turnover on the Midwest U.S. premium exceeded two million tonnes in the first eight months of this year, reflecting the political whipsaw effect on prices.

But premiums feed into the all-in price paid by consumers and the relationship with the underlying LME price has proved far from straightforward in the past.

A surging U.S. premium in the middle of the last decade, at the height of the LME's warehouse load-out problems, didn't mean a higher all-in aluminium price. Rather, as the LME price languished, the premium component assumed a greater and more volatile weighting.

There is the potential for another such realignment of the component parts of aluminium's pricing structure as ever more countries erect trade barriers.

This time around it will not be LME warehouse operators but politicians in the driving seat.

(Editing by Jane Merriman)


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