HOTTER ON METALS: Apex Act not the answer to aluminium premiums

The United States Secretary of Commerce has joined the growing chorus of voices questioning the current method of setting the US Midwest aluminium premium.

Wilbur Ross said the US Midwest aluminium premium is at inflated levels that do not justify the cost of transportation and logistical handling costs that it was originally designed to reflect.  

His view is being echoed by a number of US politicians, including Representatives Al Lawson (Democrat, Florida) and Ken Buck (Republican, Colorado), who have introduced bipartisan legislation into the House of Representatives. Legislation was also introduced in the other US congressional body, the Senate.

Various US aluminium consumers are also lobbying for the introduction of the legislation, called the Aluminum Pricing Examination (Apex) Act.  

Their argument in favor of the legislation - which is designed to enhance regulatory oversight over benchmarking entities for the US Midwest premium - is that aluminium users have faced dramatic supply chain cost increases, to the tune of millions of dollars, due to an artificially inflated premium. 

The US Midwest premium started 2018 at 9.4-9.5 cents per lb and peaked at 22-23 cents in early April of that year. It has traded sideways to slightly lower ever since. Fastmarkets most recently assessed the US Midwest P1020 premium at 18.5-19 cents per lb on Tuesday June 18. 

The increase began when the US government started to talk about Section 232 tariffs on imports of aluminium into the US and became exacerbated when it imposed sanctions against UC Rusal.

The sanctions against Rusal have since been removed, and Section 232 tariffs against Canada and Mexico have ended. Aluminium consumers who are part of the American Beverage Association, Beer Institute, Brewers Association and Can Manufacturers Institute believe premiums should have fallen further to reflect this.  

The proposed legislative solution - overseeing and investigating price setting and reporting entities in the aluminium market - is not going to push the premium lower.  

'Face' and tariffs 
At the Beer Institute's annual members meeting last week in St Louis, Missouri, the chief executive officers of major brewing companies wanted to know why they are still effectively paying a duty-paid price for aluminium when the material they are purchasing has no tariffs attached. 

On a basic level, the cost of the incremental tonne is a large part of the reason why. Metal comes from domestic or foreign sources, with the latter being exempt or not exempt from duties.  

According to the Beer Institute, Section 232 tariffs on aluminium cost the US beverage industry $250 million in 2018. But because US aluminium can sheet is more than 70% domestic scrap, and therefore not subject to Section 232 tariffs, the US beverage industry should have paid just $49.1 million last year, the Beer Institute noted.  

The remainder was paid to producers and rolling mills who charged end-users a duty-paid price as if the can sheet was imported, the Beer Institute added. 

It’s a situation that has bothered European consumers too. The Brussels-based Federation of Aluminium Consumers in Europe (Face) had their own explanation this week when they asked the European authorities to remove all import tariffs on primary and, more generally, unwrought aluminium. 

"There is no duty-free-priced unwrought aluminium available to EU users and consumers. 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," said Roger Bertozzi, head of European Union and multilateral affairs at Face.  

According to Face, when unwrought aluminium is imported into the EU from dutiable sources, the duty-paid price includes the import duty and is collected by customs officials. But when unwrought aluminium is produced in the EU or is imported from duty-free origins, a market premium reflecting the value of the 6% import tariff level is embedded in the price.  

That difference is “cashed by producers,” Face says, and is a "hidden subsidy mechanism." 

Energy 
US and European consumers are experiencing the same situation for similar reasons.  

The energy-intensive nature of producing aluminium means that regions with low-cost hydroelectric power or natural gas have a natural advantage.  

An unprecedented fifteenfold increase in spot electricity prices in the US' Pacific Northwest region after long-term power contracts expired led to the curtailment of 10 aluminium smelters located there between 2000 and 2001; of the two that remained, one is still curtailed and the other has idled some of its capacity.  

Similarly, high power prices have been behind the curtailment of around one-third of Europe’s aluminium smelting capacity since 2008, with more closures expected, including Alcoa’s Spanish smelters. Smelters’ reliance on the import of raw materials such as alumina and increasingly stringent carbon emissions targets are also critical issues in Europe. 

The location of greenfield smelting capacity shifted as a result, with low-cost producing regions such as the Middle East thriving along with Iceland, Norway, Russia and Canada.  

Smelting growth 
While this structural change was taking place, China was emerging as a global economic powerhouse. As its economy grew, so too did its metals sector, with giant smelters springing up in very short periods of time to catapult its aluminium sector into the world’s largest by 2012.  

By 2018, the call in the aluminium industry to "do something" about Chinese overcapacity was loud.  

The US response was Section 232 tariffs on almost all countries, including its biggest import source, Canada.  

The effect: In the event of a national security event during the time of tariffs, the US would have relied on aluminium imports from Saudi Arabia, while the biggest winners on the exclusions front were South Korea and... China.  

In 1970, long before China developed an aluminium industry, the European Union imposed tariffs of 3-6% on imports from the Middle East in order to prevent the influx of material and encourage domestic production growth.  

Instead, and as Face highlighted this week, European smelting capacity closed and additional metal was needed to plug the supply deficit.  

Solutions
To be sure, there are challenges to pricing the Midwest aluminium market - the high number of trading hubs, the geographic scattering of consumers and the array of ways people transport metal.

But equally significant from a consumer point of view is the fact that duty-paid material dominates the markets; Fastmarkets looked at launching a duty-unpaid premium in the US, but extensive consultation determined that the infrequency of these transactions made the assessment untenable.

It is important to acknowledge also that traders and banks provide liquidity and a source of material for consumers when they need it, and they argue that premiums reflect their risks along with the costs of storage. Producers say smelting isn’t exactly making money, as their earnings often show.

It is also true that consumers often find that costs are passed down the supply chain, with the only choice being to wear them or pass them onto the ultimate consumer on the street, such as the beer or soda drinker.

(Of course, it is also necessary to note that there is a fledgling exchange swaps market in which premium price-risk could be hedged.)

It is understandable that end users in the US and Europe should want to understand the methodology by which the Midwest premium is set and how it is being applied.

But asking the government to intercede in this area seems to ignore a more obvious first step, which is to consult with the price reporting agencies (PRAs) that produce these prices, in the interests of market transparency and to facilitate the commodities business by which raw materials are turned into the products of everyday life.

As the comments by Face reveal, European consumers attribute the issues to the duties themselves and not to the PRAs that reflect the market.

The price is only ever what somebody is willing to pay. It should be determined in the market and not by the legislature or executive.

All participants - including consumers - should engage with the process by which PRAs produce their benchmarks.

On a day-by-day and a week-by-week basis, this means not just submitting data that feeds the benchmark pricing process, but engaging in a challenging, curious and constructive way with the methodologies by which those benchmarks are produced in discussion with the PRAs themselves.

For the consumers that do not, something needs to change. Otherwise, it is as though they are not voting in an election and then moaning about the outcome.

To contribute to Fastmarkets’ US Midwest premium assessment, contact Michael Roh at michael.roh@fastmarkets.com, Thorsten Schier at tschier@fastmarkets.com or Perrine Faye at perrine.faye@fastmarkets.com. To see all of Fastmarkets’ pricing methodology and specification documents, click here: https://www.metalbulletin.com/prices/pricing-methodology.html

Fastmarkets has no financial interest in the level or direction of the assessment.

Andrea Hotter

ahotter@fastmarkets.com

Published

Andrea Hotter

June 19, 2019

19:18 GMT

New York