Could Russia’s aluminum export tax be coming to an end next month?

When news of Russia’s export tax on primary aluminum came out in the summer, it caused an increase in LME prices. More significantly, however, physical delivery premiums — such as the Midwest premium, the Rotterdam premium and the Main Japanese Port (MJP) premium — also increased.
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Aluminum premiums surge

Russia exports
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Of the three, the Rotterdam premium arguably had the biggest impact. Some European rolling and extrusion mills beginning to quote the Rotterdam premium – either duty paid or duty unpaid – as a separate component of their pricing structure.
That has long been a feature in the U.S. market, where the Midwest premium has been a sizeable component of the all-in price. However, it had never been a cost broken out for European consumers, with the mills absorbing the Rotterdam premium as part of their conversion premiums.

Russian aluminum export tax

Russia set its export tax at 15% or U.S. $254 per metric ton, whichever is larger, back in August for an initial six-month period. The move ostensibly aimed to dissuade primary metal exports in an effort to support domestic consumers facing rapidly rising costs in a domestic manufacturing sector that was running hot as it bounced back from pandemic restrictions.
The expectation was the tax would likely remain in place well into 2022, as it would provide a welcome revenue stream for the Russian treasury. However, maybe bolstered by bumper oil revenues or faced with strong lobbying by Rusal, a recent Reuters report suggests the probability is the tax will be allowed to end in December. As a result, metal supplies to Europe could increase.
Aluminum has already fallen from a high of $3,300 per metric ton to $2,700 in just over a month. The Fast Markets Duty unpaid Rotterdam premium has dropped 20% from $380 per ton in September to $302 today.

Meanwhile, U.S. premiums have fallen 20% from an all-time high last month to below $600 per ton, according to the CME today.

Market tightness

The Reuters post quotes various sources that suggest both the LME price and the physical delivery premiums will fall further (potentially much further if you believe some sources). On the flip side, metal remains tight, including primary metal, billet and downstream products.
Some mills in Europe are out to late Q2 on deliveries. Even those able to offer earlier deliveries are still late Q1. For now, demand remains robust. While prices will come down with the underlying metal and delivery premiums, conversion premiums at least are holding up.
In part, how conversion premiums fare in the months to come will be a balance between support from mill lead times remaining extended and headwinds from the lower LME/physical delivery premiums. If the latter spooks consumers into delaying purchases, mill lead times could come in and then we will see movement on conversion premiums.

Hope for easing prices ahead?

One driver of elevated conversion premiums — in the European market, at least — has been a surge in alloying element costs due to the power constraints in China limiting production and, hence, export volumes of magnesium, silicon and manganese.
But that driver, while still present, is now slackening as producers adjust to a constrained but more dependable power supply regime in China. As a result, prices have already fallen substantially since September peaks.
Whether we are seeing a pause in aluminum’s bull run or the early turn toward lower prices for 2022 remains to be seen. Some of the recent drivers are looking much less bullish than they did just a few weeks ago. Consumers have every reason to hope Q1, rather than the previously expected Q2, will see the softening of all-in delivered prices.
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