CRU Aluminum: Biden Admin Levies 200% Tariff on Russian Metal

Whether the president’s order reduces the metal flow from Russia to the US, or simply adds an untenable premium to aluminum products, the stated intent is to protect critical US aluminum production assets. The recent wave of inflationary costs, energy and raw materials has curtailed production at some of the remaining US aluminum smelters in operation. The initial Section 232 tariffs, followed by US firms self-sanctioning Russian supply since the outbreak of the war in Ukraine, have reduced Russian imports to a trickle. This latest order will drive more rigid border protections for metal looking to circumvent direct import scrutiny by means of intermediate transactions through third-party countries.

The US Customs Border Protection (CBP) agency will with increased vigilance hold importers accountable for providing “information necessary to identify the countries where primary aluminum used in the manufacture of aluminum articles imports…and derivative aluminum articles…are smelted…and derivative aluminum articles are cast.”  Aluminum imported from other countries that adopt this same level of tariff will be exempt from this statute.

The timing of this proclamation from the White House comes alongside a $2-billion US aid package for Ukraine and a recent United Nations vote (141-6-32) where member nations called for peace and Russia’s immediate withdrawal from Ukraine. Belarus, North Korea, Syria, Nicaragua, Mali, and Eritrea voted in support of Russia, while 141 countries voted for Russia to withdraw – illustrating Russia’s growing isolation on the world stage.

The practical enforcement by the CBP will be the challenging part of the code. The requirement that the importer of record must produce supporting documentation will require that the producing mill segregate all aluminum raw material inputs and maintain traceability throughout the entire chain of custody and manufacturing processes. With little Russian metal flowing directly into US ports today, the real emphasis and success of this proclamation will be on the third-party country imports.

The newly announced tariffs stops at the semis, extrusions, and rolled products level of the value chain, and does not include finished goods. Alone this could cause concern that importing countries will turn to further value-added products such as finished automotive or B&C components to circumvent the tariff. This is where current trade regulations such as the US-Mexico-Canada Act (USMCA), the Inflation Reduction Act (IRA), and the infrastructure bill will overlap as they each extol country-of-origin provisions. The USMCA and IRA protect critical components for both automotive applications and the electrification of the power grid from originating in Russia. The official White House site also mentions adding aluminum to the Buy America section of the infrastructure plan, which will further protect those federally funded projects.

LME and Midwest Premium Yet to React to Tariff Announcement

The LME remained range-bound these last two weeks, oscillating between $2,350 and $2,450 per tonne. The US Midwest premium nearby value is at $0.29/lb., before falling back to $0.265 – $0.275/lb. for the 2023 Q2 – Q4 period as the early Q1 buying normalizes and US dollar value declines. These early drivers of the 2023 price rush will ebb as the market moves into Q2. Both producers and consumers are describing the 2022 inventory handover effect as lingering still and holding on into Q2.

The market will price in upside risk given the news from Washington, with LME values expected to move higher as trading opens on Monday, Feb. 27. With the global aluminum primary inventory precariously balanced between 300 – 400kt for the year, any geopolitical upset will trigger risk. Even with slack demand persisting in Europe, and China still recovering from Covid-19 lockdowns, 43-45 days of global primary inventory is concerning under optimal conditions.

Improving Logistics May Help Ease Inflation

The winter storms that have washed across the Midwest have helped ease the drought conditions slowing and constraining barge traffic on the Mississippi River. This 2,300-mile key stretch of waterway running through the middle of the US moved 500 million tons of freight annually until a nine-month-long drought began to choke barge traffic last summer. Barge shippers were forced to move their bulk freight by rail and over the road by truck, adding to congestion and demand in those lanes while further adding to their costs.

Mississippi River water levels have risen anywhere from 5 – 25 feet in recent weeks, effectively removing any load and lane restrictions. As freight rates are easing across all modes of transportation, this relief has helped facilitate the return to more favorable manufacturing costs and consumer spending.

Meanwhile, on the West Coast, the International Longshore and Warehouse Union (ILWU) and Pacific Maritime Association (PMA) have signaled some renewed optimism in their negotiations. These talks cover 22,000 ILWU workers, serving 29 West Coast ports. No strike, no lockout, but a deal has been missing since the last contract expired on July 1, 2022. Both sides have announced good progress recently, with renewed hopes of a new contract in the coming months. During these extended negotiations, East Coast and Gulf ports have seen increased traffic as cautious shippers booked around the potential labor strife. With a deal perhaps in sight, more logistics savings may be realized as the most efficient freight routes are fully engaged.

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