Australia could end up sending more aluminum to the U.S. following the Trump administration's decision to lift temporary exemptions on tariffs for the European Union, Canada and Mexico, according to Wood Mackenzie's aluminum research head and the Australian government.
Wood Mackenzie's London-based head of aluminum markets research, Uday Patel, told S&P Global Market Intelligence that "we may see more metal coming from Australia into the U.S." due to remaining exemptions that apply to Australia, but much will depend on the economics.
"About 100,000 tonnes is exported to the U.S. on the west coast, but that will depend very much on by how much U.S. Midwest premiums react to allow for that additional freight cost," he said.
Australia produces about 1.6 million tonnes of primary aluminum a year, most of which goes into the Asian market as one of the factors that sets the main Japanese port, or MJP, premium, and Australian exporters will need to weigh up whether it is worth jeopardizing those long-term relationships for what could be a short-term policy.
"It all depends on how profitable it will have to be for Australian exporters to redirect more shipments into North America," Patel said.
"Though the metal lands on the west coast, it still needs to be shipped to the Midwest, so transportation costs may impact the net price received for the metal."
He said U.S. Midwest premiums are at around 22 US cents per pound, after the CME front-month Midwest premium contract nearly doubled from 9.4 cents per pound at the start of January to 18.5 cents by mid-March.
The Australian government Office of the Chief Economist's March 2018 Resources and Energy Quarterly said the U.S. government’s decision to impose 10% tariffs on imported aluminum is "likely to have positive impacts on Australian alumina exports."
"If the U.S. responds to the imposition by restarting idled aluminum capacity, demand for alumina will likely rise, creating opportunities for Australian alumina refineries to expand sales to the U.S.," the quarterly said.
"The exemption is likely to provide incentives to Australian aluminum exporters to divert exports to the U.S. from Asia, should U.S. aluminum premiums rise. However, U.S. tariffs could indirectly cause harm to the Australian aluminum industry, with the primary risk being Asian aluminum exporters redirecting aluminum products they are unable to sell to the U.S. into the Australian market."
A senior Australian aluminum industry source told S&P Global Market Intelligence that while Australian producers would prefer to sell into the U.S. from Canada, Australia's "fairly well established" Asian markets "may come under a bit of pressure" from other countries' product being redirected away from the U.S.
Australian smelters face balancing act
Patel said Australian smelters that have built good relationships and trust with their Asian customers need to consider whether Donald Trump will still be president in the next year or so.
"Are they going to jeopardize that by shipping less now into that market for potentially what could be a quick gain for a limited period of time?" Patel said Australian smelters need to consider.
"On top of that is the United Co. Rusal PLC sanctions and restrictions placed by the U.S., Europe, Australia, India and other markets on the export of Chinese downstream products like sheet, plate and extrusions. There's a world market outside China potentially becoming very tight if Section 232 is maintained and the Rusal sanctions continue past Oct. 23."
Patel cautioned, however, that "the balance of probability suggests that Oleg Deripaska is going to be able to reduce his ownership to sufficient level in Rusal to satisfy the U.S. Treasury enough to lift those sanctions."
Patel said US demand is so strong at the moment that Wood Mackenzie suspects that "first-use" consumers in the U.S. will still buy the metal, albeit at a higher price, because they need it, thus "stoking up" inflation in the U.S. and subsequently impacting the global economy and potentially put Trump's presidency under pressure.
"At the moment, smelters in the Middle East are continuing to sell into the U.S. paying the 10% duty, but the question is who actually pays it? Does it come off the primary aluminum smelters' margins; and is that 10% duty then given to the distributor, then to the processor, then to the final consumer?" Patel asked.
He suggested lessons should be heeded from 2002 when the Bush administration imposed steel duties of a maximum 30% on a number of countries and had to revoke them in the end because "for all intents and purposes a couple of hundred thousand jobs were lost further down the line."
Patel said that while the EU and Canada are showing anger at the Trump administration's decision, "it will be the job losses in U.S. steel and aluminum that will start to come as processors' margins are being squeezed because there's a pushback from consumers to accept the full extent of these duties."
