The US' ongoing Section 232 investigation is creating uncertainty in the aluminum market during an already volatile year, according to market sources.
The Department of Commerce's Section 232 investigation, which began in April, aims to determine if aluminum imports threaten national security, and the probe could result in the introduction of tariffs, duties or other measures.
"Geopolitical factors are making the market more volatile this year," a US scrap broker said. "Impending restrictions on imports, both in the US and in China, along with less smelting capacity and oversupply [of scrap] here are just adding to that volatility."
According to the broker, market volatility has encouraged more people to buy on contract, lowering both spot market activity and scrap prices.
"When the market was up, people were selling a heck of a lot of aluminum, and now it's dropped," the source added.
"The Department of Commerce has 270 days from the date of initiation to issue a report. The president has 90 days from that point to make a decision as to what to implement, then 30 days from there to implement the relief if he decides to," a lawyer familiar with the case said. Though Congress does not have a say in any relief that President Donald Trump may decide to bring in, its introduction will not be clear cut. The president could decide to either immediately implement relief or phase it in slowly. Similarly, the president could have a dialogue with Commerce instead of deciding what to implement and how to do so alone, which the lawyer said was "not spelled out but not prohibited."
The timeline is also not on a clear schedule. "These days are the maximum periods allowed, and all of this could happen much faster," the lawyer said.
But Trump added to the uncertainty recently when he told The Wall Street Journal that concluding the Section 232 cases is not at the top of his agenda, saying: "We don't want to do it at this moment."
DOWNSTREAM PRODUCT PRICES COULD RISE
Though what relief the president will introduce and when he will do so remains uncertain, most market sources agree that the final results could mean large increases in aluminum prices, particularly of downstream products.
In remarks released on July 14, Robert E. Scott of the Economic Policy Institute said that both the US and Canada could meet American primary aluminum demand, and added that, with a tariff on aluminum, "domestic production would rise to replace some imports, and the prices and costs of downstream products would adjust to reflect increases in aluminum prices."
US and Canadian consumption of aluminum products totaled 8.142 billion lb from January-April 2017, according to the Aluminum Association. Almost 80% of US primary aluminum consumption is met with imports, while roughly 54% of all primary aluminum ingot imports into the US came from Canada in 2016, according to the association and EPI.
"It'll be very interesting to see how Commerce treats Canada in both aluminum and steel, since there's more primary production in Canada than in the US. I'd be very surprised if Canada is not exempted," a metals expert said. One industry source, who has been briefed on the case by legal professionals, said that he thought the Canada exemption was pretty much certain at this point since Century Aluminum had agreed to it.
Downstream producers worry that the investigation's results will only increase their costs.
"For the extrusion industry, putting a tariff on primary imports -- which we are absolutely required to buy because there's not enough domestic production -- will only increase costs for domestic extruders and create incentive for other countries to dump into the US," an extrusion industry source said.
The source added that imports will most likely still be necessary, even if Canada is exempted.
"I don't believe there's enough production of primary products between the US and Canada to meet entire demand for both countries," the source said. Another industry source added that grade specifications mean that production in the US and Canada alone cannot meet demand for all variations, leaving room for imports.
Market sources expect that a duty would raise the price of the Midwest transaction premium, as producers and traders would incorporate it into their offers along with other charges. However, it is unclear if this will boost domestic production as hoped.
The Platts US Midwest Transaction premium specification is DDP US Midwest, net-30 day payment terms, meaning that all relevant charges and freight costs are paid when the metal is delivered to the buyer.
At the moment, most seem to be taking a wait-and-see approach. Though hedging on the CME could mitigate the costs of later pricing changes, recent bids have not accounted for a higher premium. Platts US Transaction premium financial swaps traded on Friday for January-June at 9.5 cents/lb; April-June 2018 at 9.5-9.75 cents/lb; and July-December at 9.75 cents/lb on CME Clearport.
Bids and offers have been scarce lately, with August indications this week at 7.6 cents bid/8.85 cents offered, while the offers on September 2017 through 2018 have been spotty, sometimes only a few lots at 9-9.5 cents, or as of Friday, 20 lots/month through December at 8.85 cents, not nearly as high as the levels being rumored should a potential duty go into effect. The industry source involved in the case, who had heard that the administration was considering duties of up to 25%, said: "If the premium today is 7.5 cents, then you're talking 27.5 cents ... you are getting an extra 20 cents for sure but that's not nearly enough to become self-sufficient, so there are going to be imports coming in."
A trader also agreed that a duty would lead to a rise in the Midwest premium, and noted that: "anyone long will sell, so people will wait to see what 232 will do."
