Aluminum, like steel, has grabbed headlines in 2018. The all-in price of this primary metal used in everything from transportation, to construction, to consumer goods has fluctuated since January — sometimes widely — in large part a response to US trade ‘war’ concerns and supply scarcity.
One effect of the 2018 tariffs and higher US aluminum prices: a scramble to ramp up domestic production. Century Aluminum, Alcoa and Magnitude 7 Metals are all working to restart three aluminum smelters idled for years.
While much has been made about higher prices, on August 16, 2018, the US all-in price for primary aluminum was 0.5% lower versus January. This dip, however, is about 10% less than the drop seen in other global markets, such as the EU, where prices are down some 10.9% on the same basis — more or less exactly the difference represented by the tariffs.
Let’s examine how the US aluminum market trades and take a closer look at the price assessment methodology adopted by market participants across the aluminum value chain.
The all-in US price of primary aluminum, aka P1020 grade (99.7% pure), has two components: the global underlying price traded on the London Metal Exchange, reflecting the value of aluminum stored in an LME warehouse in over 30 locations around the world. Plus a regional “premium,” or differential, reflecting the additional value of having aluminum delivered to where it is needed at locations across the US Midwest.
S&P Global Platts assesses what’s called the Midwest Transaction Premium, or “MWP,” using a consistently-applied and transparent methodology. The MWP is determined with prices obtained by surveying producers, consumers and traders of aluminum in the U.S. It is one of many price references available to measure aluminum’s relative market value.
Many aluminum-consuming regions around the world also price using the LME price, plus premiums. While many regions negotiate premiums at key ports, the US price has always been a delivered price, as US aluminum-processing companies expect aluminum priced delivered to their factory doors, with specific terms.
Interest in the MWP has risen markedly in 2018. Why? It is a key go-to price for understanding the US aluminum environment. It’s this US price that reflects the impact of the 2018-imposed US tariffs on aluminum imported into the United States; US sanctions on Russia’s Rusal, the world’s second-largest aluminum producer and key exporter to the US; and a host of other factors, such as the curtailed capacity of North America’s second-largest largest aluminum smelter, nationwide trucking issues and higher freight rates.
US ALUMINUM INDUSTRY SEEKS TO ISOLATE IMPACT OF TARIFFS
Producers and consumers of aluminum, seeking to understand how the US tariffs and sanctions are affecting prices and their businesses, asked price reporting agencies for help. Even in late 2017, Platts heard anticipatory calls for tariff-free pricing data as the first rumblings of potential US tariffs surfaced.
After engaging the marketplace, Platts in February launched a duty-unpaid price reference for aluminum arriving CIF (including cost, insurance and freight) New Orleans, a busy port of entry. This enabled the collection of transactional data prior to the payment of duty or other charges, at a key port, similar to European premiums which are basis Rotterdam or Japan premiums basis main Japanese ports.
But the North American market for nearly 35 years has been accustomed to a Midwest basis. An apples-to-apples comparison of Midwest value, with and without relevant duties, was desired.
So on August 1, Platts launched its new US Aluminum Midwest Transaction Premium (implied duty-unpaid) and US Aluminum Midwest Transaction Price (implied duty-unpaid). These indicators use a calculated value of the daily duty level and deduct that from the US Midwest Transaction Premium and US Midwest Transaction Price.
DUTY-UNPAID PRICE REFERENCES ARE INFORMATIONAL IN NATURE, NOT TRANSACTIONAL
The duty-unpaid values have been welcomed as additional information for the market. But the US imports 90% of its primary aluminum, and any imported aluminum by law is now levied a 10% tariff — unless granted an exemption.
For imports, there is no such thing as an actual duty-unpaid, delivered aluminum marketplace.
The US aluminum industry predominantly trades on a delivered, duty-paid (DDP) basis. Per the International Chamber of Commerce, that means the seller bears the obligation to pay for any and all applicable duties and delivery costs. With the US so import-dependent, prices of domestic or stockpiled aluminum also rose to reflect the replacement cost of that imported aluminum. Evidently, a tariff is a key factor in price formation — if you need to buy imported aluminum, the tariff just made the market price 10% higher. In a rising market, domestic producers might—or might not—also decide to command higher prices. The Platts US MWP will continue to reflect that delivered price of primary aluminum—of all origins—however it is negotiated between sellers and buyers.
S&P GLOBAL PLATTS ALUMINUM TRANSACTION PREMIUM IS BASED ON BUYERS’ & SELLERS’ PRICES
Platts does not “set” prices. It reports all data points received from its all-day surveys of buyers and sellers in the spot physical markets. Reporting that data in real-time allows the marketplace to view and validate the price data. After the market’s close, a final end-of-day price assessment is published, along with a rationale, explaining the final value.
INDUSTRY HAS CHOICE OF PRICE REFERENCES FOR VARYING PURPOSES
While a variety of price reporting agencies publish aluminum price references, Platts has a wide-ranging suite of price assessments from which to choose. Each can be used solo or in concert with others, depending on need. Examples: The decades-established, benchmark US MWP, with its liquid derivatives market enabling hedging; the historic US Aluminum Market price based on all-in price data; the CIF New Orleans Premium, valued at an active aluminum importation port; the new duty-unpaid implied Midwest Premium; and/or other pricing values along the supply chain, such as alumina (a feedstock for aluminum), scrap used beverage cans (UBCs), secondary aluminum and billet.
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