Wittbecker on Aluminum: Tariff uncertainty and UBC tightness

Trump tariffs: real or not?

The almost daily stream of new iterations of threatened tariffs has left the industry more confused than certain about how to establish a playbook. What did we learn from discussions with people across the spectrum of the value chain?

There seems to be consensus that Mexico will be hit with the 25% tariffs. Mexico is blamed for both drugs and undocumented immigration. It will pay the price for both.

Another contributing factor is Mexico’s 0% tariff structure on primary aluminum, which is perceived to allow Chinese and other origin metal to indirectly leak into the US in the form of semis and finished goods produced within Mexico. Mexico’s unwillingness to publish detailed import statistics on its metal trade flow has only heightened suspicions that China is using Mexico as a backdoor into the US to evade duties applied on direct shipments.

The view on Canada is far from consensus. Some believe that they will be hit with the 25% duty initially, then negotiate for exemptions once it is determined what exactly Trump wants in exchange. He is fixated on the fact that the US runs a trade deficit with Canada, which he considers a subsidy to their economy. The facts tell us that Canada’s trade surplus is driven exclusively by large crude oil exports to the US. In fact, Canada supplies 60% of the imported crude coming in and has done so for over 30 years. If you removed crude oil from the equation, the US runs a trade surplus with Canada, even considering the $11.5 billion of aluminum that Canada sends south each year.

If Trump wants to run a trade surplus with Canada, he faces the dilemma of taxing that crude oil and trying to force the Canadians into a few options: to divert shipments; to leave it in the ground for better days; or see US crude prices rise to reflect the clearing price/cost of that Canadian crude with a 25% tariff applied. The latter outcome would raise energy costs and inflation, in direct contradiction to his campaign pledges about costs.

The aluminum market seems to be on the fence, discounting a full-throated implementation of tariffs. A 25% tariff on Canadian aluminum on paper would send premiums to $0.45-$0.50 per pound. Spot premiums are $0.24-$0.25 per pound. The forward curve, as represented on the CME, shows April through December 2025 at $0.28-$0.30 per pound, Q1’25 at $0.31 per pound.

Unintended consequences of taxing Canada and Mexico loom large

One very alarming consequence of hitting Canada with a 25% tariff would be opening the door to imported primary, semis and finished goods from other origins that might come in at proposed 10%-20% universal tariffs.

Conventional wisdom has been that if the 25% is applied, Midwest premiums would respond accordingly. Given that most flat rolled products, extrusions and castings are directly indexed to the Midwest, a full pass-through would be done and the downstream market would be unharmed. Wrong! This ignores the risk created by the difference between Canada’s 25% tariff and the other origins at 10%-20%.

Semis and finished goods from non-Canadian origin could enter the US, enjoying a 5%-15% cost advantage over domestically produced goods having to absorb a Midwest premium reflecting that 25% Canadian tariff. This could lead to an increase in imports.

Primary metal imports from non-Canadian origins would also enjoy this tariff differential. One could expect imports from the Middle East to rise. This would effectively mean that our import supply chains could get longer as the market exchanges Canada for the Middle East.

The repercussions on scrap are also large.

A tight used beverage can market gets tighter

The proposed 25% duties on Canada and Mexico potentially wreak havoc on the used beverage can (UBC) market. A central theme at the conference was how tight UBCs were and how unprofitable it was to melt them at the current price. These potential duties would aggravate the situation and risk wholesale diversion of valuable Canadian and Mexican supply to Asia.

The US relies on a substantial flow of UBC from Canada’s deposit system. These are extremely high quality, dependable receipts. A 25% tariff on these cans adds about $0.29 per pound to the duty-paid cost to the US can sheet mills.

UBC prices today are already untenable for the mills, trading at 83% of Midwest P1020. Considering that melt loss alone is 12%, UBC should never be worth more than 88% of P1020 less processing costs. The gap between the 83% market price and 88% leaves 5% to cover processing. That is less than $.06 per pound today and that’s inadequate. So, UBC today are already a losing proposition for the mills even before the possible imposition of the new tariff.

Trump’s advisers say these tariffs will be absorbed by the exporter and it will not impact the US buyer. That is simply not factual. In the case of UBC, the reaction will be swift. These cans will be exported off the Canadian West Coast to Asia, notably South Korea, Thailand and now China, which is showing strong interest in importing UBC.

This is one reason we hear industry leaders in the US are already lobbying for Canadian scrap to be exempt from any tariffs.

At the same time, Mexican UBC, which have traditionally flowed north to the US will seek the same Asian markets as their Canadian counterparts. This will be particularly harmful to Aluminum Dynamics (ADI), which has invested millions in their San Luis Potosi recycling facility. This plant was designed to capture the large Mexican UBC supply and turn it into sheet ingot for export to the new Columbus MS rolling mill. A 25% tariff on the sheet ingot would make this movement economically untenable.

This would push ADI into the US domestic market to bump heads with the incumbent players who have already pushed prices up to uneconomic levels.

Could tariffs be a blessing in disguise for the recycling market?

The risks to UBC supply described above are very real.

However, another school of thought is that if the Canadians are hit with the 25% tariff and if Midwest fully prices P1020 in at the higher $0.45-$0.50 per pound premium over LME, then it is possible that the scrap versus P1020 spreads would open up for domestic supplies.

There is logic here. Historically, whenever we see upside volatility in P1020 prices (late 1980’s, mid-1990’s, 2007-2008, 2011, 2022), the discount for scrap to primary widens. A move from $0.25 per pound premiums today to $0.45-$0.50 post implementation of tariffs could produce the same outcome.

However, the wild card here arguing against this for UBC is the new element of Asian demand pulling Canadian and Mexican cans away from the US. Other grades, sourced within the US may very well experience these widening of discounts.

Uncertainty breeds economic inertia

One area of broad agreement in Florida was that the unknowns around tariff policy is killing capital investment across a host of industries. Despite the hype about these tariffs being used to stimulate a revitalization of American industry, it is chilling investment. People are concerned about more inflation — not less inflation. That means interest rates might not come down and might even go up.

Overall demand for aluminum is still viewed as “spotty,” especially amongst the value-added products such as billet, sheet ingot and foundry alloy. The exception might be aluminum rod, where expectations are bullish because of the demand for more electricity to feed the tremendous growth in AI and data centers in general. The downside to this AI/data center growth story is that it puts power costs for other industries very much in jeopardy.

The latest news about Stargate, the massive AI project, is viewed as potentially raising electricity costs. That makes Century Aluminum’s new greenfield smelter an even tougher task.

Editor’s note
This is an opinion column. The views in this article do not necessarily reflect those of SMU. We welcome you to share your thoughts as well at info@steelmarketupdate.com.