US Al premiums see muted reaction to tariff removal

US market participants do not expect the removal of tariffs on aluminum imports from Canada and Mexico to have a big impact on the US midwest premium for primary aluminum in the short term.

Little spare North American capacity and an expectation that sellers will try to avoid flooding the spot market have quelled initial fears that the tariff removal would result in a sharp decline in US premiums.

The Trump administration officially removed the 10pc tariff on aluminum and 25pc tariff on steel imports from Canada and Mexico on 19 May. But Canada, which holds most of the continent's primary aluminum capacity, has little incentive to sell into the US at lower premiums, market participants said.

"Canadian producers, namely Rio Tinto Alcan and Alcoa, have origins which are duty free across the globe and if behaving in similar manner would not be inclined to sell cheaper simply because the origin is duty free," one trader told Argus.

Mexico has no primary aluminum smelters.

US consumers were more uncertain about the impact of the removal than sellers. But even they said there has been little effect yet on the physical market.

"I have seen no impact yet with the 232 duties being dropped from Canada. [Comex] future premiums have dropped to the 15.5¢/lb range," one extruder said, "Everyone is still digesting everything. Maybe by the end of the week we will have our arms around it better."

Rio Tinto Alcan told one US mill buyer that the company would continue to quote "market pricing," even if the tariffs were removed.

"My thoughts are that premiums will not be affected, or will be minimally affected," the buyer told Argus.

Another factor supporting premiums in the face of new volatility is a strong contango around $30/t between cash and three-month LME aluminum contracts. The contango gives traders the support to not cave to lower bids.

Still, one primary smelter said the move could hurt the P1020 sales merchants from far-away countries that grew accustomed to a very tight US market while the tariffs were in place.

"The US will become a tougher market and the margins will decrease, forcing some ‘exotic' suppliers to reconsider their [US] strategy," he said.