Aluminium through the looking glass after Trump’s tariffs
March 13 2018 10:27 PM

By Andy Home/London

In a little more than a week’s time the United States will impose a tariff of 10% on all aluminium imports and 25% on all steel imports. Except for those from Canada and Mexico. For now.
Their exemptions have been folded into separate negotiations on the North American Free Trade Agreement.
Other countries may receive exemptions as well, depending on who qualifies as a “real” friend in the eyes of US President Donald Trump.
So far, only “our ally, the great nation of Australia” has been given the Presidential nod. What were announced as global tariffs are already morphing into something more complex, shaped by confusingly elastic politics. The aluminium market, however, hasn’t waited for the many nuances to play out. It has quickly adjusted to price in a post-tariff environment.
Not on the London Metal Exchange (LME), where the aluminium price at $2,100 a tonne is little changed since Trump signed the executive orders for tariffs last Thursday. Rather, the price reaction has taken place in the physical premium paid by US manufacturers for their metal. The CME front-month Midwest premium contract has nearly doubled from 9.4 cents per lb at the start of January to its current 18.5 cents. Expressed in dollar terms, the jump in premiums by $200 a tonne equates to nearly 10% of the cash LME aluminium price. The last time US aluminium premiums were at this sort of level was in 2014 and 2015. Back then US aluminium users were in uproar.
This time they’re largely silent, even though the impact could be worse. Producers who were on the back foot four years ago have since seized the political initiative, helping to shape policy that links national security to their survival.
Trump’s tariffs have sent the US aluminium sector tumbling through the looking glass into a world of inverted narratives.
At the height of the aluminium premium bubble this decade a US manufacturer was paying almost 24 cents per lb ($509 a tonne) over the LME price to obtain physical metal.
What had previously been a stable, minor component of the “all-in” price took on a monstrous life of its own.
Manufacturers, who had neither the tools nor the experience to handle the premium blow-out, went on the warpath, bringing down a storm of media and regulatory fire on the London Metal Exchange.
Long load-out queues at LME warehouses in Detroit, they claimed, were directly inflating physical premiums.
Sitting at the centre of the storm was a warehousing company called Metro International Trade Services, acquired by Goldman Sachs in 2010. The two companies’ strategy of maximising queue revenue was accompanied by rising premiums, a virtuous circle for them but a vicious circle for aluminium buyers. The collective outrage, led by companies such as MillerCoors dragged US lawmakers and even the Commodity Futures Trading Commission into the fray.
Producers, who were benefiting from the windfall premium, were largely muted.
The whole sorry saga ended with the LME introducing tough new load-out rules, Goldman selling Metro in 2014 and the warehousing company being fined $10mn by the LME in 2016, still a record penalty imposed by the exchange.
Fast forward to the present and it is a former Goldman Sachs president and erstwhile commodities trader, Gary Cohn, who has been trying to sway President Trump from imposing tariffs, albeit unsuccessfully.
He has resigned from the Administration. US aluminium producers, meanwhile, have found their voice.

* Andy Home is a columnist for Reuters. The views expressed are those of the author.

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