March 14, 2018 / 1:03 AM / in 9 months

RPT-COLUMN-Aluminium through the looking glass after Trump's tariffs: Andy Home

(Repeats without change. The opinions expressed here are those of the author, a columnist for Reuters)

* U.S. aluminium premiums: tmsnrt.rs/2GiuQPb

By Andy Home

LONDON, March 13 (Reuters) - In a little more than a week’s time the United States will impose a tariff of 10 percent on all aluminium imports and 25 percent on all steel imports.

Except for those from Canada and Mexico.

For now.

Their exemptions have been folded into separate negotiations on the North American Free Trade Agreement.

Other countries may receive exemptions as well, depending on who qualifies as a “real” friend in the eyes of U.S. President Donald Trump.

So far, only “our ally, the great nation of Australia” has been given the Presidential nod.

What were announced as global tariffs are already morphing into something more complex, shaped by confusingly elastic politics.

The aluminium market, however, hasn’t waited for the many nuances to play out. It has quickly adjusted to price in a post-tariff environment.

BACK TO THE FUTURE?

Not on the London Metal Exchange (LME), where the aluminium price at $2,100 a tonne is little changed since Trump signed the executive orders for tariffs last Thursday.

Rather, the price reaction has taken place in the physical premium paid by U.S. manufacturers for their metal.

The CME front-month Midwest premium contract has nearly doubled from 9.4 cents per lb at the start of January to its current 18.5 cents.

Expressed in dollar terms, the jump in premiums by $200 a tonne equates to nearly 10 percent of the cash LME aluminium price.

The last time U.S. aluminium premiums were at this sort of level was in 2014 and 2015.

Back then U.S. aluminium users were in uproar. This time they’re largely silent, even though the impact could be worse.

Producers who were on the back foot four years ago have since seized the political initiative, helping to shape policy that links national security to their survival.

Trump’s tariffs have sent the U.S. aluminium sector tumbling through the looking glass into a world of inverted narratives.

Graphic on LME aluminium price and U.S. premiums:

tmsnrt.rs/2GiuQPb

BUYERS ON THE WARPATH

At the height of the aluminium premium bubble this decade a U.S. manufacturer was paying almost 24 cents per lb ($509 a tonne) over the LME price to obtain physical metal.

What had previously been a stable, minor component of the “all-in” price took on a monstrous life of its own.

Manufacturers, who had neither the tools nor the experience to handle the premium blow-out, went on the warpath, bringing down a storm of media and regulatory fire on the London Metal Exchange. Long load-out queues at LME warehouses in Detroit, they claimed, were directly inflating physical premiums.

Sitting at the centre of the storm was a warehousing company called Metro International Trade Services, acquired by Goldman Sachs in 2010.

The two companies’ strategy of maximising queue revenue was accompanied by rising premiums, a virtuous circle for them but a vicious circle for aluminium buyers.

The collective outrage, led by companies such as MillerCoors dragged U.S. lawmakers and even the Commodity Futures Trading Commission into the fray.

Producers, who were benefiting from the windfall premium, were largely muted.

The whole sorry saga ended with the LME introducing tough new load-out rules, Goldman selling Metro in 2014 and the warehousing company being fined $10 million by the LME in 2016, still a record penalty imposed by the exchange.

PRODUCERS’ REVENGE

Fast forward to the present and it is a former Goldman Sachs president and erstwhile commodities trader, Gary Cohn, who has been trying to sway President Trump from imposing tariffs, albeit unsuccessfully. He has resigned from the Administration.

U.S. aluminium producers, meanwhile, have found their voice. They have helped to change the national debate from one of protecting consumers from high premiums to one of protecting smelting capacity from high imports.

To be fair, they are now delivering on their part of the bargain.

Century Aluminum intends to restart about 150,000 tonnes of annual capacity at its Hawesville smelter in Kentucky.

Magnitude 7 Metals (M7M) will restart two out of three potlines at the 263,000-tonne Marston smelter in Missouri — one in the second quarter and the other in the third quarter.

Combined with Alcoa’s already initiated restart of some of its idled capacity at the Warrick smelter in Indiana, these reactivations will mean that national capacity utilisation starts approaching the Administration’s 80 percent target.

It would probably only take one more smelter to restart, even partially, for President Trump to declare mission accomplished.

BEER AND NATIONAL SECURITY

But at what cost to aluminium buyers? Consumer voices of protest have been curiously absent.

The Can Manufacturers Institute (CMI), one of the few industry groups even to issue a public statement, said only that it was “disappointed” with the decision to impose tariffs.

But then, when the argument is that tariffs will protect American jobs and national security, who wants to take the opposite side of the debate?

The simple truth remains, however, that a 10 percent jump in the aluminium price is only going to have one possible outcome.

The CMI estimates that the combination of steel and aluminium tariffs adds one cent on every one of the 119 billion cans consumed in the United States every year.

Actually, aluminium users might have a double problem.

The premium bubble of 2014-2015 occurred against a backdrop of falling LME aluminium prices. When accused at congressional hearings of ramping up physical market premiums, Goldman Sachs argued that the “all-in” aluminium price — the premium plus basis LME price — was still lower than it had been.

This time around, rising premiums overlay an LME basis price that itself is in bull mode, up 25 percent since the start of 2017.

U.S. aluminium buyers still have one card to play.

Both the CMI and the Beer Institute are going to seek exemptions on the grounds that they won’t be able to source all the metal they need in the United States and that “imported aluminum used to make beer cans is not a threat to national security”.

It all depends on what counts as “national security” in this looking-glass aluminium world.

Editing by David Goodman

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