CRU Aluminum: Trade Flows, Supply Chains Dominate 2023 Planning

Reports on Potential Russian Aluminum Tariffs Surface

As witnessed in October 2022, talks of US-imposed punitive tariffs on imports of Russian aluminum products have again embroiled the markets as resulting demand and supply impacts of such a tariff are considered. An unconfirmed and unidentified federal government employee has raised the possibility of a 200% tariff, vs. an outright ban, on Russian imports of aluminum. It did not come up during President Biden’s State of the Union address.

US aluminum producers and consumers have been self-sanctioning since the war in Ukraine began on Feb. 24 of last year. US aluminum producers and consumers have eschewed new business with Russian suppliers. Some companies have opted to let earlier contracts run their course, others halting business altogether. A few US business entities with assets in Russia at the outbreak of the war have sold those assets at a considerable loss. During this time, there has been no federal action impacting aluminum products, other than the tariffs that were already on the books prior to the outbreak of war.

A 200% tariff on Russian aluminum products creates an untenable scenario to sustain any deals for metal that falls under the new tariff. Primary ingot, rolling slab, and billet supply had been sustained since the outbreak of war. In 2021, Russian metal accounted for upwards of 10% of US aluminum imports, but that volume has declined steadily to an estimated 3% for 2022. Clearly, the self-sanctioning by industry participants has had an impact.

There is little doubt that Russian exports have indeed continued to flow, albeit at a discount to market prices, and have incurred additional freight expense as the commodity forms are shipped by Russian producers to more cooperative regions. The excessive freight expense, discounting, and a proposed 200% tariff would make sustaining a strategic supply position unlikely. The market is soft early in 2023, and absent supply stress, aluminum consumers have become accustomed to working around Russian supply.

Over the last week, too, Russian primary ingot flowed into LME Asian warehouses. Up considerably from October, Russian metal now accounts for 40.6% of primary metal on the exchange at month-end January 2023. This compares to October 2022, when Russian primary metal represented only 14.9% of on-warrant LME stocks. The location of metal aligns with the countries still willing to do business with Russia, while US LME warehouses have zero Russian metal.

As the war enters its second year, the issue for the Biden Administration is to constrain Russia’s cash flow and the funding for military hardware and mercenaries. Aluminum is a globally traded, highly fungible commodity in a liquid market. With little concern for the US aluminum infrastructure, the opportunity, and the timing of a 200% tariff may have arrived.

The LME moved $130 lower last week on this news. The tariff rumor was paired with other news of unfavorable quarterly reporting from aluminum producers. Still, at $2,470 per tonne, that’s $150 – $200 above the close of the 2022 market. The US Midwest premium nearby value is at $0.29 /lb, before falling back to $0.265 – $0.275 /lb 2023 Q2 – 4Q as the early Q1 buying normalizes and US dollar value declines. These early drivers of January’s price rush will ebb as the market moves into 2Q.

USMCA and IRA Interpretations Causing Disputes

In this uncertain world, improved trade flows with US partners to the north and south, Canada and Mexico, is an increasingly strategic imperative. The recent USMCA (United States-Mexico-Canada Agreement) ruling is an important event affecting this critical trade deal. In late December, a USMCA panel sided with joint-complainants, Canada and Mexico, involving the rules of materials origin. The dispute centers on the provisions stating that if one of the core parts of an automobile uses materials that fit the established 70% rule of origin, then that component should be counted as 100% originating from the region. And the 30% metal balance that might be from less-friendly regions should not be counted when qualifying the vehicle as a whole.

The United States disagrees with this interpretation. It believes that all metal from outside the recognized region should be counted in the final qualification. Currently, there are many original equipment manufacturers (OEMs) from Japan and Europe that fall just below the 70% threshold. This ruling could help them qualify should they source their core parts from North America. An example would be the Toyota Camry, which currently has 65% of its content sourced from the US and Canada. That is below the necessary 70%, but both the engine and the transmission are from the US. This is not the only example, however, and there are many vehicles walking this fine line, as reported by the US Department of Transportation.

An important facet of the USMCA is how it interplays with the Inflation Reduction Act (IRA). The IRA has similar rules for origin of source material, with a focus on electric vehicles (EVs). However, they differ from the USMCA and could cause automobiles to qualify for one but not the other law. The IRA also has some controversy as the IRS recently released a fact sheet that implied that leased vehicles can take advantage of the tax credit even if the vehicle was not assembled in the US. Currently, the USMCA, the IRA, and other US-manufacturing focused legislation have sparked battery-related investments, and supports the recent wave of investment in US aluminum semis (sheet, plate, extrusions) used in EV vehicles. With new capacity scheduled to come online in the next 24-36 months focused on automotive, alongside strong post-pandemic growth expectations, it is a good opportunity for domestic aluminum producers to gain share of important components for the next generation of cars and trucks.

The auto industry is not the only aluminum-intensive segment to come under focus. The White House also announced it is working to include aluminum in the Buy America requirements of the infrastructure act. Currently, only steel and iron are included. Should this go through, it would force new infrastructure projects operating under the new bill to use US-sourced aluminum. These issues remain undecided, as the balance of the North American metal supply and production capabilities await the qualification criteria these laws require.

By Stephen Williamson, CRU Research Manager, stephen.williamson@crugroup.com