By Andy Home
LONDON (Reuters) – It’s going to be a busy year for aluminium traders as the global market navigates multiple geopolitical storms.
Topping the list of potential trade disruptions is the incoming Donald Trump administration and the threat of tariffs on U.S. imports from Canada and Mexico, two of the country’s top suppliers of the light metal.
Next (LON:) up is the prospect of the European Union (EU) banning imports of Russian aluminium as part of the bloc’s 16th sanctions package against Russia over its invasion of Ukraine.
That would accelerate Russia’s pivot towards Asia but China’s appetite for more aluminium is uncertain given the removal of the tax rebate on the country’s huge exports of semi-manufactured products.
Throw high alumina prices and falling London Metal Exchange (LME) aluminium stocks into the mix and it’s a recipe for market turbulence.
TRUMP 2.0
Will he, won’t he? Trump has repeatedly threatened to impose 25% tariffs on U.S. aluminium imports from Canada and Mexico.
Canada is by some margin the largest supplier of primary metal to the United States, accounting for 79% of total imports in the first 11 months of 2024. Mexico is a major supplier of aluminium scrap and aluminium alloy.
The market is unconvinced that tariffs will be imposed, or at least for any extended period of time.
The CME Midwest premium contract, the best indicator of tariff risk, has risen since Trump won the U.S. election in November but the gains have been muted relative to the notional impact of a 25% increase in cost to U.S consumers.
However, Trump has a history of disruption when it comes to Canadian aluminium. When he introduced 10% tariffs on aluminium imports in 2018, Canada was initially included, then exempted in 2019. It was included again in August 2020 before being exempted again a month later.
In his first administration Trump used aluminium tariffs as a blunt-force bargaining tool to force concessions across an array of trade disputes with his northern neighbour and there’s little reason to think Trump 2.0 is going to be any different.
RUSSIAN ROULETTE
The European Union is drawing up plans for a new round of sanctions on Russia next month as the war in Ukraine marks its three-year anniversary.
European policy-makers until now have held off on fully banning imports of Russian aluminium but that looks set to change this year.
EU aluminium users have been steadily weaning themselves off their dependency on primary Russian metal. The Russian share of the bloc’s total imports fell to 6% in the first 10 months of 2024 from 11% and 19% in 2023 and 2022 respectively.
But at 130,000 metric tons in the January-October period, Russian exports to Europe were not insignificant and any ban is likely to force a scramble for alternative suppliers.
Russia has steadily increased sales to Asian consumers over the last three years, particularly China.
China’s imports of Russian metal grew from 291,000 tons in 2021 to 1.2 million tons in 2023 and were on track to match that total in the first 11 months of 2024.
But can China continue absorbing so much metal?
The country ended tax rebates on exports of aluminium products such as bars, rods and foil at the start of December, potentially jeopardising an annual flow of around five million tons to overseas markets.
That’s a worse-case scenario but there seems little doubt that semi-manufactured products exports will drop this year, reducing demand for imported primary metal.
BULLISH COCKTAIL
Rusal, Russia’s dominant producer, likely won’t have as much metal to shift this year.
The company said in November it would cut output by 6% in response to soaring prices for alumina, the raw material for smelter production.
Some of the heat has come out of the alumina market since then as a severe squeeze on the Shanghai Futures Exchange (ShFE) contract dissipated over the end of the year.
But ShFE prices are still up significantly on the start of 2024 and Western alumina prices remain stuck at elevated levels.
Stocks of aluminium on the LME, meanwhile, have been steadily falling in recent months and open tonnage of 249,000 tons is at its lowest level since May 2024.
There’s a lot of smoke and mirrors around LME aluminium inventory movements with warehouse arbitrage as important a driver as supply-demand fundamentals.
But the heady combination of raw materials tightness, low inventory and trade uncertainty has spurred LME three-month aluminium prices. They hit a one-month high of $2,700 in Monday trading.
LME time-spreads are tightening. The benchmark cash-to-three-months period this week is trading at a contango of $10 per ton, compared with $40 a month ago.
Seemingly overlooked in the market’s calculations is the potential chilling effect on global consumption of a full trade war between the United States and everyone else.
But then there’s a lot of other moving parts to the aluminium price equation right now and most of them are on the supply side.
However, the one certainty is that what was once a fully globalised market is going to fracture further into distinct geographical parts.
Regional physical premiums may be where the real action lies in the months ahead. That was certainly the case under Trump 1.0.
The opinions expressed here are those of the author, a columnist for Reuters.
