As tariffs and sanctions roil the aluminum market, we look at how the market is responding to a geopolitical environment that has presented both risk and opportunity. While the London Metal Exchange (LME) price is up 1% since the beginning of 2018, having spiked 27% in April, the Midwest premium has been even more volatile – rising 142% over the same timeframe.
The Midwest aluminum premium futures contract was originally created to reflect the transportation costs of moving aluminum from Baltimore to Midwest consumers. Today, it reflects the supply and demand fundamentals of the North American market relative to those of the global LME price. The contract allows U.S. consumers to more effectively manage the price risks associated with North American material and has become increasingly relied upon as the U.S. has grown more dependent upon imports to satisfy its aluminum consumption needs.
North America’s aluminum market share has been declining for the past two decades due to higher energy prices and rising labor costs relative to other countries. Since 2000, 20 U.S. aluminum smelters have closed. This has caused an approximately 70% decrease in aluminum production and resulted in a 58% employment drop in the domestic aluminum market. Today, just two companies account for approximately 75% of the 1 million metric tons of U.S. production.
As U.S. production has fallen, aluminum imports now account for 90% of U.S. primary aluminum demand and 64% of total U.S. aluminum consumption. The U.S. Midwest swap premium began rising in January when the Department of Commerce announced its investigation into the aluminum market. The February release of the Section 232 report brought uncertainty into the North American aluminum market, fanning the price of North American metal higher still. Given these supply/demand dynamics, the announcement of a 10% tariff on aluminum imports added 9% to the Midwest premium, which had already increased 99% since the beginning of the year.
Global aluminum prices declined steadily over the first quarter of 2018. LME prices finished the quarter down approximately 7.5%, a reflection of the global supply and demand fundamentals. Much of this decline can be attributed to increases in global aluminum inventories. Both the LME (shown in the nearby chart) and the Shanghai Futures Exchange reported greater than 10% increases.
When President Trump placed sanctions on more than 60 Russian individuals, the global aluminum supply balance was shocked into uncertainty. The specific sanctions imposed on Oleg Deripaska, the majority owner of Russian aluminum production company Rusal, effectively sidelined 13% of the world’s non-Chinese supply.
The initial confusion as to how Russian material produced prior to the sanctions would be treated caused global aluminum prices to spike in the most volatile fashion the market has seen in decades. The global benchmark aluminum price, as listed on the LME, rallied over 28% in just two weeks. The price of three-month LME aluminum, the most heavily traded, rose to a high point of $2,538.76 per metric ton – a level not seen since August 2011. As the market adapted to the new fundamental picture, the North American regional market also responded, with the already inflated Midwest premium rallying another 17%. At these combined levels, most domestic aluminum smelters would be able to restart production despite higher energy and labor costs.
Many view President Trump’s tariffs and sanctions as a one-two punch intended to kick start domestic production. Others believe the aluminum market is being used as a pawn in a larger trade negotiation. Regardless of one’s opinion, it is clear that in the short term, aluminum in America will be more expensive.
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