Just the rumor that producers in the United Arab Emirates and Bahrain could win a Section 232 aluminum tariff exemption was enough to ease prices for U.S. consumers.
The Trump administration imposed the 10% tariff under Section 232 back in March 2018. Now, however, the removal ostensibly comes as a reward for the two Arab states establishing formal ties with Israel.
The benchmark U.S. Midwest physical delivery premium collapsed from $335 per ton in mid-September to $263 per metric ton on the back of the rumor, according to Reuters.
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Section 232 tariff exemption for major producers
Both countries are significant aluminum producers and suppliers to the U.S. market.
Bahrain’s Alba mill produced more than 1.36 million tons of aluminum last year. The mill supplied 11%, or 150,000 metric tons of its output (mainly billets) to the U.S. market.
Of its sales last year, 44% were value-added products (or VAPs, as they are termed in the trade). Those products include rolling slab, billet, primary foundry alloy and wire rod.
Primary mills try to boost their output of VAPs over standard ingot because they earn higher returns, over and above the cost of manufacture. For their customers, VAPs avoid the need to remelt ingot and cast into those forms before they can consume the primary mill’s products, saving energy and, hence, costs.
Emirates Global Aluminium (EGA) sold a total of 2.60 million tons of cast metal in 2019, of which 87.4% was VAPs, according to Reuters. Although they declined to be specific, their U.S. value-add exports have been estimated at about 550,000 tons last year.
U.A.E., Bahrain producers could gain market share
The fall in the MW premium is good news for consumers. However, U.S. producers will not view it as positively, as they are already facing a significant resumption of Canadian imports.
Usually, when government grants an exemption — as Canadian producers enjoy — it will impose a quota to prevent a flood of metal from the newly tariff-exempted supplier.
That will likely be the case for EGA and Alba. As such, the sharp drop in the MW premium is reflecting an expectation that the two substantial producers will be in a position to use their newfound competitiveness to take market share.
If, for example, EGA has a quota set at last year’s 550,000 tons, it could export 750,000 tons and pay the 10% duty on the excess amount. As a result, it would effectively incur only a 2.7% duty overall.
If the mill felt long-term positioning would be helped by greater market share, the tradeoff may be considered acceptable.
What’s next for domestic mills?
Domestic mills, whether aluminum or steel, generally position themselves at or around the import price when the government imposes tariffs.
Generally, however, they do not seem to add more capacity to take long-term advantage of the extra margin the tariff provides. Why? Possibly because they do not expect the tariffs to exceed more than one or, at most, two cycles of administration.
They only lasted a little over a year and a half under the Bush administration from 2002 to 2003. While they have lasted two and half years under Trump, their efficacy at stimulating a resurgence of domestic production has been limited.
Last year Canada remained the U.S.’s largest external aluminum supplier in all forms, with China coming in second.
Chinese supply, however, has been falling rapidly with tariffs and duty action over recent years. As a result, the actions of third-placed U.A.E. and sixth-placed Bahrain have become progressively more important in influencing market prices. It is a role in which it looks like they just got helped to have even more impact.
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