Wittbecker on Aluminum: Unpacking the chaos

Question: Why is the Midwest Premium (MWP) declining in the face of the new Section 232 tariffs that came into effect March 12?

Answer: This may be a case of “buy the rumor, sell the fact.” The market has heard many forecasts about the MWP going sky high, some say $0.50-$0.53, and the most provocative, $0.65. Our math says fair value at current LME and duty unpaid replacement is around $0.42-$0.43. Premiums are reportedly $0.37-$0.38. So why isn’t market trading full replacement? We believe premium longs are taking profits here, having enjoyed a nice run up from $0.20.

Fundamentally, the market has to eventually trade to replacement. Even if Canada secures a Section 232 exemption, there is no reason for the market to discount the 25% tariff as much as it has. We think MWPs are a buy at these levels.

Question: What is the best and worst-case scenario for Canada on these tariffs?

Answer: The worst-case scenario for Canada would be getting hit with the 25% Country of Origin (COO) tariff plus the Section 232 tariff with no exemptions. The best-case scenario would be for Canadian aluminum to earn exemptions from the COO tariff and the Section 232 tariff on the grounds of being a critical mineral. The base case scenario is for Canada to pay the 25% Section 232 tariff and be exempt from a COO tariff.

There is an argument that the 10% tariff applied to crude oil and potash under COO may set the precedent for aluminum to be hit with 10%. This would make the US market unattractive to Canada and force Canada to divert exports to the EU. It is unlikely that the MWP will give Canada the luxury of pricing that extra 10% in the transaction price as long as other exporters enjoy the lower 25% tariff.

Question: How is the Section 232 tariff impacting value-added products such as billet, foundry, slab and wire rod?

Answer: These products are sold basis the Midwest duty paid P1020 market, so much of the price escalation due to the 25% tariff on P1020 will flow thru to Midwest. However, there is a gap on the impact of the 25% tariff on the upcharges for these products. For example, if billet is being sold at $0.10/lb upcharge to Midwest duty paid, the duty on just the upcharge is $0.25lb. The underlying Midwest duty paid price will NOT cover that incremental tariff. This is why some importers are already raising their billet upcharges for spot sales to as high as $0.13 over Midwest.

We also understand that consideration is being given to add a surcharge to Canadian value-added products coming into the US to cover the 25% tariff on the upcharge. That will be $0.25 for billet and as much $0.65 on wire rod.

Question: How does aluminum scrap come out of this?

Answer: Scrap is fully exempt under the Section 232 tariff now in effect. However, it may not escape tariffs imposed on Canada under the broad COO 25% tariff. If Canadian scrap is hit with this duty, exports to the US would likely stop overnight and those metal units would be exported to Asia, largely as UBC. This would be a disaster for the US sheet mills, who depend on the deposit quality UBC from Canada. UBC discounts to P1020 would narrow again and make it very difficult for mills to enjoy any savings using UBC vs. P1020.

Question: There’s been little talk about the 2x 10% incremental tariffs placed on China. How does this affect the U.S. metals market?

Answer: It has little impact on aluminum, since China does not export primary aluminum and its semis products, such as sheet, plate and extrusions, are already subject to punitive anti-dumping and countervailing duties.

Where this could have some impact is in magnesium and manganese scraps that had been coming to the US. The US magnesium market has moved almost exclusively to secondary magnesium from scrap, with about 90% of supply being secondary. A similar trend exists in manganese. These tariffs will push up the replacement cost of scraps from China and force both alloys to higher prices in the U.S.

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.