By Andy Home
LONDON, May 27 (Reuters) – Aluminium has been one of the industrial metals hit hardest by the coronavirus.
Inventory has surged, with 663,475 tonnes of metal placed on LME warrant since the middle of March, lifting headline exchange stocks to a three-year high of 1,493,775 tonnes.
COVID-19 has crushed both demand and price with a collective producer supply response lacking.
Poor global market dynamics look even worse in North America, where the physical premium has imploded since March.
So severe has been the collapse that aluminium could be facing its own WTI oil moment with the premium turning negative.
Conceptually at least.
In reality, unlike the April meltdown in the WTI oil contract, no-one in the United States is going to be trading a negative price for their metal.
The U.S. aluminium market remains defined by the 10% import tariff introduced by the Trump Administration in May 2018.
The spectre of a negative premium is just the latest manifestation of the disruptive power of those tariffs.
The CME Midwest Aluminium spot contract has fallen to $179 per tonne (8.105 cents per lb) from over $300 in mid-March and a peak of almost $500 in 2018 after the tariffs were first introduced.
Plot the premium on a chart and it appears to have fallen to its lowest since 2017. But that doesn’t allow for the tariff effect.
The CME contract is based on S&P Global Platts’ (Platts) assessment of the price of metal delivered to a user in the U.S. Midwest. The resulting premium has always been duty-paid. Just there was no duty prior to 2018, and now there is.
The pricing agency helpfully launched a duty-unpaid aluminium indicator, based on the simple mathematics of deducting the 10% duty and the estimated cost of freight to a Midwest user.
As such, duty-unpaid metal in Canada is currently calculated at just 2 cents per lb, or $44 per tonne.
Evidently, were the duty-paid premium to fall further, there is the potential for the duty-unpaid premium to turn negative.
Which would be very strange indeed.
Aluminium is not oil. The storage squeeze behind WTI oil’s swoon into negative territory doesn’t apply to a commodity that can be stacked on any surface hard enough to carry its weight.
BEER HITS THE FLOOR
Since the aluminium premium for U.S. delivery has never been negative before, the prospect has prompted some to suggest Platts should introduce a floor price on the unpaid premium.
The agency is currently consulting on the specifications of its premium assessments.
U.S. beer-makers, who use a lot of aluminium, are vehemently against the idea.
“A price floor is a price control (and) Platts cannot create price controls to inhibit the market from operating freely in accordance with the law of supply and demand,” according to Mary Jane Saunders, general counsel of the Beer Institute, writing in an open letter to Platts.
The institute has been a vocal critic of the post-tariff pricing landscape in the United States, its members paying duty even on domestically produced metal.
You can understand why they don’t want to see what they view as an artificial floor price in the market.
Except that there is no market for duty-unpaid aluminium. Platts no doubt wishes there were. It has added a duty-unpaid New Orleans calculation to try and generate some interest.
But no-one trades it and no-one is referencing it in their supply contracts.
Europe has liquid markets in both duty-paid and duty-unpaid. Dutch ports such as Rotterdam and Vlissingen have long been global storage hubs for duty-unpaid metal.
But as far as U.S. delivery is concerned, the duty-unpaid premium is a purely mathematical calculation.
Were Platts to introduce a floor on its duty-paid Midwest assessment, that would be an altogether different matter.
But that’s not what is being proposed. Indeed, it’s far from certain that Platts will go with any floor price at all.
KICKING THE CAN(-MAKERS)
The whole debate may end up being academic. It’s noticeable that the CME’s forward premium contracts have held up much better than spot.
Cash metal has being crushed by the collapse in North American aluminium demand, particularly from the all-important automotive and aerospace sectors. The CME contract structure suggests the market is pricing in a slow recovery in usage in line with lifting lockdowns.
Beer-makers have likely fared batter than automakers during quarantine but their aluminium pricing problems remain.
The absence of an assessable market for duty-unpaid metal may reflect the lack of a gravitational storage hub such as Rotterdam but it may also be symptomatic of producer reluctance to even countenance the idea.
Beer-makers are surely right to argue they shouldn’t have to pay the duty on domestic production or even on Canadian imports after last year’s United States-Mexico-Canada Agreement on trade.
But as any European aluminium consumer would tell them, things don’t work out that way when it comes to import duties.
“There is no duty-free priced unwrought aluminium available to EU users and consumers,” said Roger Bertozzi, head of EU and multilateral affairs at the Federation of Aluminium Consumers in Europe (FACE).
The federation released last year a study on the long-term impact of Europe’s tariffs on the aluminium sector, which found that suppliers are always incentivised to sell at the highest possible price.
Or as Bertozzi explained: “Through a non-transparent market mechanism, the equivalent of the value of the highest level of the tariffs structure, or 6%, is included in the market premium for all the unwrought aluminium sold in the EU, irrespective of origin.”
Tariffs are the core problem for Europe’s consumers and now for U.S. ones too.
A negative premium isn’t going to happen, not in any tradeable way, but it’s another reminder of how trade barriers distort reality.