In a world of new normals and unprecedented events, a slight glimmer of normality has returned to the European aluminum market. The spread between duty-paid aluminum and duty-unpaid aluminum is again approaching the cost of paying the duty.
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Historically, the spread has been close to the cost of paying the 3% import duty, as seen in the chart. However, since March 2020 the spread has been much smaller, which can be largely attributed to the strength of the duty-unpaid market compared to the duty-paid market.
The cost of duty is 3% of the LME cash price of aluminum. Cash prices for aluminum have risen as demand for the metal has soared as markets continue to recover from the COVID-19 slump of 2020. LME cash prices stood at $2,492.0/mt July 23, up $831/mt on a year ago. As the price of aluminum on the LME rises, so too in theory should the spread between duty-paid and duty-unpaid metal in Rotterdam.
The duty-unpaid market is inherently reliant on imports and has thus been exposed to the meteoric rise in container freight rates since 2020. The S&P Global Platts container assessment for North Asia to the European continent has increased by 1,014.8% on year.
The massive increase in the cost of freight has meant that importing metal into Europe for the spot market on containers is uneconomic at current Rotterdam premium levels. To complicate matters further for hopeful recipients of imported aluminum, an open Chinese arbitrage through 2020 and parts of 2021 and a structural shift of Russian units away from Europe and towards China has put European consumers at the bottom of the pecking order.
With imports remaining uneconomic, and Rotterdam uncompetitive compared to global markets, replacing duty-unpaid units has grown increasingly difficult. One trading house told Platts it is sold out of duty-unpaid and unable to replenish stocks.
In a market with structurally tight supply, prices typically go one way.
The duty-paid market showed more resistance to price increases through the first half of 2021 due to its greater liquidity compared to the duty-unpaid market. This is evidenced by the reduced spread between the two markets; however, prices have still significantly increased, and are at their highest level since 2014, with duty-paid premiums increasing by increasing by 86.88% in the first six months of the year compared to 118.18% on duty-unpaid.
"All through this year it's been duty-unpaid driving the price which is a supply side story, now it's duty-paid and it's a demand side story," a second trader said.
Impact of Russian export tax plan
Since the Russian government announced plans at the end of June to charge a 15% export tax on certain metals including aluminum, the prices of both duty-unpaid and duty-paid have shot up. Platts' duty-paid and duty-unpaid assessments are up 35.92% and 35.71% respectively since the announcement on June 24.
Expectations around the market are that Russian producers will look to pass on some of the costs of the tax to consumers.
To try to mitigate an expected prolonged period of increased premiums due to the export tax, consumers have been heard trying to sign fixed price deals for as far away as Q1 2022.
"Aluminum is normally a buyers' market, but it has switched now, my customers are very worried that they can't get units so are trying to buy far in advance," a trader said.
The growing number of Q1 2022 duty-paid enquiries has meant that sellers have increased their prompt offers levels to be enticed into selling now rather than selling forward at a higher premium. On July 22 the LME was in a $34.89/mt contango for Cash-Jan 21.
Multiple sources have told Platts that they would expect to sell Q1 for close to $400/mt in-warehouse Rotterdam and that for prompt business they would not sell below where the swaps are trading. On July 22 the August CME duty-paid contract was sold at $350.
The phenomenon of consumers looking to secure a fixed price contract for Q1 2022 has been heard only in the duty-paid market thus far: market participants however expect unpaid buyers to follow suit.
From mid-July, prices for duty-paid metal have been strengthening relative to the unpaid due to the uptick in forward demand and a return to the cost of duty spread between the unpaid and paid markets is now seen.
A duty-unpaid trade was reported to Platts at $284/mt IW and a duty-paid trade was reported at $360/mt IW: currently the cost of paying the 3% duty is $73.88/mt.
However, sources have told Platts that despite the spread returning to historic levels it is unlikely that duty-unpaid metal will be cleared and sold as duty-paid. "You'd be crazy to do that," one of the traders said. "We're so tight on unpaid, and replacement is uncertain, I'm holding onto my unpaid units."