On February 24, the U.S. government announced a 200% tariff on Russian aluminum imports. This covered not only primary aluminum but also products. One might have expected that the MW premium would rise on the tariffs due to the inability of certain companies to supply the U.S. market under the new regime. Instead, it fell from 29.25 ¢/lb in February to 25.25. This suggests that the market is skeptical that the tariffs will be implemented in a way that causes disruption to the U.S. market. Nevertheless, they do seem to be deterring more international buyers from Russian product. This is supporting rising global inventories, of which a large share is of Russian origin.
A key question when the tariffs were announced, not yet fully answered, is how thoroughgoing they will be and what documentation the U.S. Customers and Border Protection (CBP) will require to prove traceability. We believe this is to give the CBP time to organize their systems and implement a consistent process for tracking product origins.
At the time of the announcement the wide potential scope of the tariffs and their punitive level was surprising. The U.S. imported 3.9 Mt of primary in 2022 or 77% of domestic demand. Only 5% of this came directly from Russia. The U.S. and Canada also imported about 22% of their domestic requirement of semis of which just 0.3% was Russian. However, a far greater percentage of semis imports came from countries using Russian aluminum as a feedstock. For these producers, proving that their exports to the U.S. have been segregated and not made with Russian aluminum is liable to be a headache. This may be even more difficult for the vast number of finished product exports, such as window frames, car parts etc.
Exporting regions affected could include Turkey, India, the EU, and China to name a few.
Nevertheless, based on the behavior of the Midwest premium, we believe the market is at present discounting the possibility of a jarring dislocation of supply to the U.S. market. Were the tariffs to be implemented immediately and thoroughly, one might have expected the MW premium to jump sharply in anticipation of a shortage and a scramble for new suppliers. Instead, it has fallen from 29.25 ¢/lb on the date of the announcement to 25.25 today, with trading in the futures market suggesting further declines may be ahead.
One possible explanation is that the market may now anticipate only a gradual introduction of the new rules with time given to customers to find alternatives. The recent delays in implementation give credibility to this view. We are awaiting trade data for March but so far there has not seemed to have been dramatic shifts in bilateral trade flows to the U.S. market.
On the other hand, the tariffs do seem to be warding off more international companies from buying Russian aluminum. In our previous article “Bullish aluminum to be tested in 2023” we suggested that reported inventories of aluminum could rise this year. Since then, aluminum inventories have increased by close to 50% with Russian metal comprising an increasing share. Despite this, inventory levels remain low by historical standards.
CRU’s central view remains that with the global markets broadly in balance, total inventories are unlikely to rise substantially above current levels. However, with trade restrictions tightening we believe the proportion represented by Russian metal is likely to increase.
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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.