Wittbecker on Ali: The aluminum tariff dilemma

So, the logic being applied is, “Let’s put safeguard duties on these critical imports in order to incentivize companies to increase domestic production.”

Duties of 25% on Canada accomplish what? Lessons from Section 232

Let’s think back to March 2018 and the imposition of Section 232 duties on steel (25%) and aluminum (10%).

In steel, those safeguard duties appear to have stimulated domestic production. Between 2018 and 2023, domestic steel production rose 2.3 million metric tons (mt) and electric-arc furnaces (EAF) took the lion’s share of capacity growth. In 2020, EAF comprised 36% of capacity additions. In 2023, they were 92%.

Aluminum has not enjoyed any benefit from Section 232. In 2018, primary production was 891,000 mt. In 2023, production was down to 750,000 mt. January-October 2024 production stood at 564,000 mt, with the annualized run rate now at 678,000 mt. During January 2024, Magnitude 7 Metals shuttered its New Madrid, Mo., smelter, leaving the US with just four operating smelters.

US imports 86% of its primary aluminum… and Canada is #1

The US remains a substantial deficit market in primary aluminum, requiring about 4.8 million mt of supply against that 678,000 mt of domestic output, or imports of about 4.1 million mt.

Canada supplies about 70% of those import requirements and in calendar-year 2024, those imports were worth about $USD11.5 billion. A 25% duty on Canadian aluminum would saddle US aluminum buyers with another $ 2.87 billion in costs from the imposition of a 25% duty. This assumes that Canada would continue to supply the US.

Canada should join the EU … the tariff could effectively put them there

An article in The Economist on Jan. 2 argued that Canada should join the EU. The logic was that the EU needs resources and Canada needs people. In other words, the EU provides viable markets for its resources. A move by the Trump administration to tax Canadian imports at 25% would effectively push Canada into the EU aluminum market on the basis of pure economic netbacks.

A 25% duty on aluminum levied on just the underlying LME cash price on Jan. 7 (~$2,500/mt) equals $625/mt, or $0.28 per pound. Unless the US Midwest aluminum ingot premium expressed over LME cash would rise by that amount, Canada will look for alternatives.

Here is the recent physical ingot premiums:

The current Midwest premium as quoted on the CME for calendar 2025 ranges from $0.2497 (January) to $0.2680 (December). This clearly does NOT reflect an assumption of the 25% duty coming into effect.

For Canada to justify maintaining its current level of exports to the US while incurring the 25% duty, Midwest premiums need to rise about $0.19 per pound. Otherwise, Canada will divert its production to the EU, where it would be welcomed with open arms. Canadian metal is low-carbon (e.g., 2 mt of CO2 per mt of production) and would find a ready market in the EU, which stands on the verge of implementing its carbon border adjustment mechanism (CBAM) in January 2026.

Why is market so nonchalant about potential impact of tariff?

The CME and the Midwest have been heating up over the past two weeks, moving from ~$0.20 per pound to the current level above. However, it’s well short of the threshold required to recoup the duty import. When speaking with a respected physical trader recently, the comment was, “It is an extremely high risk vs. reward trade to add to a premium long at even these levels. Demand is still not that great and you are trying to handicap Trump’s mindset day by day. That is a dangerous play.”  

What we are seeing are traders quietly positioning their physical premium longs within the US and not risking the effects of the duty on fresh imports. This is taking the form of metal placed into public warehouse, custom-cleared or placed into consignment deals at consumer mills. Either approach ensures that metal is not liable for the higher duties from either a universal tariff or one targeted against Canada.

Inflation with a capital “I” when it comes to Canada

This uncertainty over the imposition of duties against Canada comes at incredible potential cost to the US economy. Beyond the aluminum costs mentioned above, Canada’s total exports to the US are about $412 billion. A 25% “haircut” for Canada would equal $103 billion that would have to be reckoned with. Some goods, like aluminum, could simply move elsewhere. However, some of the product flow may be inelastic, and the burden of those duties would ripple through the supply chain to the ultimate end consumer.

Stay tuned for the next chapter.