U.S. Midwest Premium Remains High to Consumers’ Chagrin

Aluminum base prices on the London Metal Exchange (LME) have been sliding for the last couple of months, suggesting we have a market in surplus.
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So when the United States removed tariffs on imported steel and aluminum from Canada and Mexico last month, you would have expected the resulting flood of lower-priced aluminum would have driven down the Midwest Premium.
No such luck.
Despite a minor blip, it has remained stubbornly elevated at over USD $400 per ton, raising howls of protest from consumers (particularly in the beverage can market).
But before we accuse primary mills of gouging the market, let’s consider some points made by Andy Home in a Reuters article this week.
First, some context supporting the consumers’ position. Canada accounted for some 51% of aluminum supply to the U.S. market in 2018, with Australia, Argentina (who were exempted from the start) and now Mexico making up another 8%, so that nearly 60% of supply is now duty-exempt.
Yet prices have not really shifted despite jumping from $0.10/lb before the tariffs were announced to over $0.22/lb now – well above the 10% (about $0.08-$0.09/lb) that could reasonably be attributed to the tariff.
That raises the question as to what is really going on: if elevated Midwest Premiums are not really reflecting the 232 10% import tariff as many have maintained, then why do they remain elevated? Does their persistence after the tariff removal mean they may be a long-term feature of the market?
Technically the Midwest Premium has generally been explained as the cost of delivery to a U.S. consumer, largely reflecting haulage costs.
But while it is a reflection of that, it is also much more, Home suggests.
The CME contract traded volumes equivalent to almost 2.5 million tons last year, not just from trade hedging but as a market in its own right. The U.S. market remains incredibly tight. Prices aside, the loss of some 350,000 tons of supply from the Becancour smelter in Canada due to a lockout has not even begun to be replaced by domestic U.S. restarts amounting to only some 90,000 tons.
The market has continued to grow, but supply is constrained – surely that should be reflected in the LME price, you may ask?
Yes, in a fully functioning market it should be. The U.S. isn’t a market isolated from the rest of the world — so what are premiums doing elsewhere?
Rotterdam P1020 duty-unpaid premiums rose to about U.S. $100 per metric ton this month, up from $90-$95 per metric ton late last month. However, duty-paid premiums in less-traded and lower-volume Mediterranean markets, like Spain, eased slightly to U.S. $350-$360 per metric ton from a shade higher last month (not far off Midwest Premium levels, according to AluminiumInsider).
Premiums in South America are even higher, reaching U.S. $500 per ton in Brazil. The premiums are not reflecting the scarcity of metal, per se, so much as the scarcity of metal in a particular location.
But if some justification for the premium can be made, what about the elevated prices being paid by consumers despite a declining LME? Home has some thoughts for us on that, pointing to the revenue earned by suppliers in this elevated market, noting the U.S. government collected only around $50 million in tariffs.
Some of the difference, an estimated $27 million, went to U.S. primary aluminum smelters. The bigger part, $173 million, went to U.S. rolling mills. The latter, according to the article, have been pricing their can stock to include the 10% tariff, even though primary metal only accounts for around 30% of the input (the rest is scrap).
The beverage market is far from alone in this. For those consumers who do not break down the raw material, delivery premium and value-add elements of their pricing, mills have managed to push through price increases in excess of 10% on the back of less than 10% cost increases.
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Consumers, then, do have grounds for discontent.
What they do about it in the face of a still tight market for many grades is tough, but breaking out base metal, premium and gaining as much transparency as possible into the value-add is a big first step. It provides data for negotiation and a structure for analyzing price changes with greater power in the hands of the buyer.
In a difficult market, consumers need all the tools they can lay their hands on.

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