CRU: Longshoremen’s Strike in 2022—Further Risk to a Fragile Supply Chain

The U.S. East Coast and Gulf Coast ports have a master agreement in place between the ILA and the U.S. Maritime Alliance (USMX) until 2024. However, the looming problem could be the expiring agreement between the International Longshore Workers Union (ILWU) and the Pacific Marine Association (PMA). This deal expires in July 2022 and covers 29 ports in California, Oregon and Washington. Tensions are already running high as the union fights efforts by PMA to further automate operations. The ILWU is clearly focusing on wages and benefits, even as the West Coast faces market share losses due to cost and congestion.

The carriers are enjoying record earnings and the ILWU will be eager to get a share of that largess. The carriers could seek a peaceful, albeit expensive, settlement to preserve cashing in on this unprecedented boom in container demand and pricing.

Serious negotiations won’t talk place until after ILWU leadership elections this fall.

What Does this Mean to the Markets at Large and Aluminum?

Any potential strike on the West Cost is problematic. The carriers’ ability to rotate vessels into the Gulf and East Coast is severely constrained by congestion there. Any such rotation only lengthens the delays in an already stretched supply chain.

U.S imports of aluminum are big. Excluding Canadian imports, seaborne imports of primary aluminum are 1.5 million tons per year. That’s about 30% of our annual requirements. We also import substantial volumes of sheet/plate. Can body stock imports alone comprise nearly 450,000 metric tons or about 20% of demand.

Historically, the market response to strike risk is to build inventory ahead of the contract expiration.

The current fundamental conditions in both primary aluminum and semi-fabrication production totally preclude that response.

North American primary production is falling. As discussed last week, the strike at Rio Tinto’s smelter in Kitimat, British Columbia, will cut 250,000 tons per year of output. For the balance of 2021, that will be around 125,000 tons of direct impact. U.S. smelter production remains flat-lined.

Trader-held inventories are being rapidly depleted as Midwest duty-paid ingot premiums continue to set new record highs of 32-33 cents per pound over LME. Replacement costs are even higher and arrivals of fresh metal from LME warehouses in Asia (where most of the remaining global stocks lie) are now projected into first-quarter 2022.

The situation in flat rolled products is equally tight. All domestic rolling mills are running flat out. Antidumping actions on common alloy aluminum sheet from 18 countries have cut import supply and enabled domestic mills to fully load their capacity into first-quarter 2022.

Can sheet capacity, while not impacted by the antidumping action, was already fully booked thanks to robust beverage can demand.

Consumers will undoubtedly attempt to front-end load primary metal to the extent they can. This will only aggravate the strong nearby premium structure of the Midwest, likely setting up a severe squeeze in the first quarter. Premiums had been expected to top out in the “30’s”, but this latest risk to the supply chain could set us up for a serious test of premiums in the “40’s”.

On flat rolled products, the market has few options given that offshore mills are also heavily loaded. But to the extent supply is there, we can expect to see conversion fees expressed versus London Metal Exchange ingot to move sharply higher as inventory builds are executed.

Greg Wittbecker joined CRU in January 2018 after retiring from Alcoa, where he was Vice President of Industry Analysis and Managing Director of Alcoa Beijing Trading, based in Shanghai, China. His career spans 35 years in the aluminum industry, having also held senior commercial and management roles at Cargill, Wise Metals and Koch Supply and Trading. Greg brings perspective on the entire aluminum supply chain from bauxite to aluminum finished products and will be a regular contributor to SMU going forward. He can be reached at gregory.wittbecker@crugroup.com

Request more information about this topic.

Learn more about CRU’s services at www.crugroup.com