July 9, 2018 / 12:56 PM / 2 months ago

COLUMN-Beer versus aluminium; the U.S. battle-lines are drawn again: Andy Home

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

* US aluminium premium: tmsnrt.rs/2NBTOfF

By Andy Home

LONDON, July 9 (Reuters) - The price of aluminium paid by consumers in the United States has risen sharply this year.

This is not entirely surprising, given the imposition from the start of March of a 10-percent tariff on just about all imports of the metal.

But has the price risen too much?

The Beer Institute, which represents the country’s more than 5,000 brewers, thinks so.

It has asked the Department of Justice and the Federal Trade Commission to “address potentially anticompetitive activities in the aluminum market that are driving up aluminum prices”.

Thirty-two U.S. lawmakers think so as well.

That’s how many members of Congress signed a June 18 letter to the U.S. Attorney General, urging an investigation into “possible irregularities” that are impacting “the American consumer at the rate of hundreds of millions of dollars every year”.

The collective target is the spike in the U.S. Midwest aluminium premium, set by S&P Global Platts and traded in derivative index form on the CME.

The premium, according to the Beer Institute, “has become a device to speculate and artificially inflate the price paid for aluminum at the expense of end-user businesses and consumers”.

Experiencing a sense of deja-vu? Well, that’s understandable because it’s not the first time U.S. beer-makers have claimed manipulation of the premium.

The last time it was all the fault of the London Metal Exchange (LME) and a shadowy conspiracy of warehouse operators, big banks, producers and traders.

None of the multiple ensuing lawsuits made it beyond the first stage of the courts.

Is there any more merit to the complaints this time around?

Graphic on the CME Midwest aluminium premium contract:

tmsnrt.rs/2NBTOfF

REGIONAL DYNAMICS

The Midwest premium is charged by suppliers of aluminium into the U.S. market over and above the LME cash price.

It’s supposed to reflect the specific logistical and physical dynamics of the North American market.

At a current 20.5 cents/lb ($451 per tonne) the CME’s spot contract has more than doubled this year.

Both brewers and members of Congress think this is excessive, arguing that the rise is greater than warranted by the imposition of tariffs alone.

However, that is to suppose that tariffs have been the only factor in the premium price mix this year.

Even before President Trump indicated on March 1 that tariffs were coming, the CME cash premium had risen from 9.5 cents/lb to 13.6 cents.

It did so on a combination of rising trucking rates and the hit to local supply from a Jan. 11 strike and lock-out at the Becancour smelter in Canada.

The plant, majority owned by Alcoa, produced 438,000 tonnes last year but has been operating at around one-third capacity since then.

The stand-off between management and the union continues. So too does the bleed of lost metal.

THE SANCTIONS HIT

A far bigger hit to supply came on April 6, when the Trump Administration imposed sanctions on Russia’s Oleg Deripaska and his Rusal aluminium empire.

Russia was the second largest supplier of commodity-grade aluminium to the U.S. in both 2016 and 2017. Imports of Russian metal were 600,000 tonnes and almost 700,000 tonnes respectively in the last two years.

The impact on the premium was as significant as the March tariffs confirmation. Indeed, in terms of further-dated CME premium contracts, the impact was actually greater, the six-month futures contract jumping more than 13 percent in a day.

The LME aluminium price went supernova at the same time, three-month metal soaring to a near 7-year high of $2,718 per tonne.

London aluminium has since corrected back down to a current $2,105 as the market prices in a deal between the U.S. Treasury and Rusal to allow sanctions to be listed.

But the premium hasn’t corrected for the good reason that there is a lot of Russian-brand aluminium already in the United States thanks to those high imports over the last two years.

Some end-users may be happy using it. Many others may be much less so. This leaves a significant amount of potentially available metal in legal limbo.

This “phantom supply” could go a long way to explaining the persistent strength of the premium.

Both the Beer Institute and the 32 members of Congress argue the premium shouldn’t be so high when there are “record stocks” of physical aluminium in the United States.

But all that metal is quarantined from a transactional premium if most of it is not actually capable of being transacted.

MINDING THE GAP

Given this combination of rising transport costs, local smelter outage, tariffs on imports and sanctions on the second-largest source of aluminium, it would be strange if the U.S. premium wasn’t as high as it currently is.

Moreover, it’s worth remembering the reason that none of those lawsuits against the LME, the banks and traders made it to trial a few years ago.

Aggrieved end-users couldn’t convince a judge they had been disadvantaged by a high premium when their overall cost of aluminium had actually fallen in the years of alleged manipulation.

The “all-in” price, LME basis price plus physical premium, is what aluminium buyers actually pay.

And while it is up so far this year, it has risen by just 4 percent, the spike in the physical premium being offset by a decline in the LME price.

What really irks end-users, both then and now, is the disconnect between premium and LME basis price rather than the “all-in” price.

Back at the start of the decade, when the LME warehouse furore first started, there was a genuine issue with consumers’ inability to hedge their exposure to the premium given the lack of any tool-kit.

Now, by contrast, there is a liquid CME derivative which could be used to smooth out the impact of a rising premium.

It seems curious that America’s brewers haven’t done so, since the tariff impact on the premium was all too predictable as soon as the Commerce Department unveiled its recommendations for some sort of trade action on national security grounds as far back as February.

The tariffs and the resulting strong premium are there to help U.S. aluminium producers, particularly those trying to restart idled capacity.

Given the United States’ dependency on aluminium imports, the bill for that assistance was always going to land with the country’s aluminium users.

Blaming S&P Platts for that looks like a classic case of shooting the messenger.

Again.

Editing by Louise Heavens

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