High aluminum price will affect more than the cost of your 6-pack

The last few months have seen rare volatility across the price of aluminum in markets around the world.

History shows that trade wars, sanctions and the fear of commodity scarcity have long been factors to incite a buying rush in physical commodities. When a number of these come together — as they have in the aluminum market recently — it’s the perfect psychological storm to create price upheaval.

{mosads}In the U.S., the price of aluminum jumped 26 percent at its peak in April, and it remains 12-percent higher since January. If the price rise is sustained, it could have wide-ranging implications for many sectors, including transportation, construction, electrical and consumer goods.

From February 16 to March 23, the demand from U.S. manufacturers for metals and other materials was the strongest in more than 10 years.

During this period, the Institute for Supply Management’s Purchasing Managers’ Index (the PMI) showed U.S. manufacturing activity at 60.8, which is well above the 50 mark that signals growth or decline. Demand for aluminum was strong and remains that way.

During the same period, supply was affected by market uncertainty around aluminum and steel tariffs. Tariffs and trade issues started dominating headlines in mid-February. In early March, the Trump administration announced a 10-percent tariff on imported aluminum that would begin later in the month.

As specific country exemptions were announced — including Canada, the largest supplier of aluminum to the U.S. — domestic and global aluminum pricing edged lower. But the U.S. market did not decrease much because of regional supply concerns, in part due to output at a Canadian smelter still being curtailed and exemptions for key aluminum import partners being only temporary. 

In fact, when the 10-percent tariff on U.S. imports of aluminum was announced on March 8, the regional price differential of aluminum in the import-dependent U.S. market jumped 11.8 percent, as compared to a typical day-to-day price move that ranges between -2 percent to +2 percent.

The Midwest Premium provides transparency into local market conditions.

In the United States, the marketplace generally prices aluminum as the London Metal Exchange (LME) price plus the “Midwest Premium.” The S&P Global Platts Midwest Aluminum Transaction Premium is a regional differential to the global price of aluminum, which is traded on the LME.

The Midwest Premium is assessed using a published methodology and sheds light on local U.S. market conditions. The differential reflects the regional cost of logistics, such as trucking freight and handling charges, as reported to Platts price assessors by a wide range of market participants.

Importantly, it also reflects regionally specific supply and demand conditions in the U.S. The purpose of S&P Global Platts’ independent price assessments is to publish prices reflective of market value, as determined by buyers and sellers in the open markets, and bring greater transparency to spot physical markets.

The price of imports rose for the U.S. but dropped elsewhere. 

Following the U.S. tariffs announcement, the price of aluminum in the United States rose, reflecting that the potential supply of aluminum to the U.S. just got 10-percent more expensive for companies looking to import foreign aluminum to the country — and the U.S. is a net importer of aluminum.

Not all aluminum supply available for import by the U.S. is created equal. Some forms and origins, such as those reflected in the Midwest Premium, are preferred by many U.S. mills, extruders and remelters, versus others.

At the same time, other countries importing aluminum, such as Japan, saw their local price drop according to the regional premium to LME, colloquially known as the Platts MJP (Main Japanese Port), because the material that may have gone to the U.S. before the tariffs could now be re-directed to Japan.

Soon after the tariffs were imposed, a second major shock to aluminum prices worldwide came in April when the world’s second-largest aluminum producer, Russia’s Rusal, was subject to U.S. sanctions. This further increased prices by another 11 percent in North America.

This time, however, the policy action also pushed up prices elsewhere. Anyone looking to buy or sell Rusal material, priced in U.S. dollars globally, was put off by the sanctions, meaning a large portion of the world’s potential supply was taken away overnight. Prices in Japan jumped more than 60 percent in a week.

Regional price differences are common.

On May 25, the Platts Midwest Premium accounted for 17 percent of the total global LME price plus regional differential. This is comparable to the 16 percent discount of Midland, Texas crude oil compared to the benchmark West Texas Intermediate (WTI) oil price in Cushing, Oklahoma, and a consequence of the impact of pipeline bottlenecks in Texas.

Similarly, in the winters of 2014 and 2018, regional U.S. natural gas hubs saw dramatic price spikes on so-called “polar vortex” storms, which caused increases in both outages and demand.

Market forces drive local pricing differentials against global benchmarks as a matter of course worldwide.

Today, there remain lingering uncertainties regarding the future status of supply from Rusal and how the import tariffs will play out, making price transparency critical to both businesses and consumers.  

Joe Innace is the content director of Metals/Americas for S&P Global Platts. He’s also an award-winning business writer, recognized as Steel Journalist of 2015 by the World Steel Association.