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Consultation period helps clear air on implied duty-unpaid premium, explain difference from Midwest premium

Market feedback is critical to any organization, but particularly for price reporting agencies such as S&P Global Platts.

Market dynamics – the factors that drive supply and demand and ultimately, pricing – should play out unfettered in any truly free-market economy.

Both of those themes were clear in the feedback gathered during a recent market consultation regarding Platts’ implied duty-unpaid US Midwest P1020 aluminum transaction premium.

For background, Platts launched the implied duty-unpaid premium (DUP) in August 2018, at the request of market participants who believed a calculated number would add additional transparency. These participants wanted a simple mechanism that would provide a duty-free value for market reference, in order to gauge where value might be if the Trump administration had not implemented 10% tariffs on aluminum imports.

It’s worth remembering that the DUP is not a price assessment, but rather a calculated number which strips out the cost incurred if importing tariffed material. Market participants in the US and around the world have chosen to trade aluminum on a delivered, duty-paid basis, relying on Platts’ longstanding US Midwest P1020 aluminum transaction premium (MWP).

With the MWP’s recent rapid decline, market participants pointed out that it appeared likely the implied DUP could soon fall below zero. As a derived value – not an assessment like the MWP – they questioned whether it would still reflect market value if that happened.

A derived value is simply a calculation, while an assessment involves frontline price reporters collecting bids, offers, indications and transactional data and then applying a transparent methodology and independent, informed judgment to assess where market value is at any given moment in time.

On May 4, Platts opened a consultation period, publishing a note to the market at large asking for feedback on the DUP’s calculation.

Among the options considered were the establishment of a possible floor for the calculation of the implied duty-unpaid premium, based on related CIF values or historical assessed values for the MWP itself, before the imposition of duties.

The consultation ran through May 18. The feedback was significant and represented the full spectrum of market participants.

Some argued that the calculation used for the DUP could be improved in comparison to other assessments of tradable value – that it did not reflect an observable value for that metal in the marketplace, so a different approach might be needed. Others said the calculation clearly reflected a basis valuation of the net return to an importer subject to duties.

The bulk of respondents were unsupportive of the implementation of a floor as a potential concept.

Markets work themselves out, many said. A floor, even for a formulaic value like the DUP, introduces a sense of artificiality, others said. Any floor value, whether at zero, or some other value, would be at best somewhat arbitrary. In other words, let famed economist Adam Smith’s “invisible hand” continue to move freely.

In the early days of 2018, the market reacted sharply to a combination of the tariffs, sanctions on Rusal, labor strife and other supply/demand fundamentals, and the MWP ballooned to 22.5 cents/lb.

Fast forward to today, the sanctions on Rusal and tariffs on Canada – the main exporter of aluminum to the US – have been lifted. The domestic market has returned to pre-tariffs pricing. As of May 26, the MWP stood at 8.25 cents/lb – a level not seen since late 2017. The implied DUP was at 1.867 cents/lb.

Based on the market feedback gathered during the consultation, Platts published a subsequent note on May 27 announcing it would not change the methodology used to calculate its implied duty-unpaid US Midwest aluminum P1020 value (DUP).

For more than a century, the goal of every price published by Platts – whether an implied, calculated value or an assessment – has been to reflect each commodity’s market value.

In the end, the feedback collected informed Platts’ decision. Market dynamics will continue to drive pricing, both in assessments and calculated values.