Andy Home: Bad news for American beer consumers as aluminium tariffs begin to kick in

Here are some good news about aluminium in the United States. President Donald Trump has backtracked on his threat to slap a 50% tariff on Canadian metal imports.

The bad news. They will have to pay a 25% tariff on all aluminum products, regardless of where they come from.

The market has already changed to reflect Trump's double-down on tariffs in order to revive domestic smelting capacities.

CME Midwest Premium, which reflects the cost of unwrought aluminum delivered to an American fabricator above the London Metal Exchange base price, has reached record highs.

The premium on aluminium will continue to flow down until it reaches the final user. This could be Ford Motor, Lockheed Martin, or any of the many independent breweries in the country.

Tariffs are still the same as they have been and will remain so long as the United States is dependent on imports.

HANGOVER TARIFF

The original tariffs Trump imposed on aluminum in 2018 were 10%. Within a year, the Beer Institute, a group that represents nearly 8,000 American brewers, estimated the additional $250 million they cost to the industry.

Harbor Aluminum, a consultancy, found that 50 million dollars had been sent to the U.S. Treasury. Another 27 million dollars went to domestic smelters. The remaining $173 million was given to fabricators who turn metal into aluminium sheets for beer cans.

The Beer Institute was irritated that the import duty was passed on, despite the fact that U.S. cansheets typically contain around 70% recycled material sourced locally.

Tariffs usually work in this way.

Ask European aluminum buyers. Import tariffs on aluminum range from 3% for primary aluminium up to 6% for some alloys.

Researchers at the LUISS university in Rome have studied the impact of the metal duty exemption on consumers. In a paper published in 2019, they found that despite the fact that around half of the imports of the European Union were made up of duty-exempt material, the final price for everyone was 6%.

Researchers found that producers are encouraged to "align" their prices at the highest level possible, i.e. the price paid in duty.

In 2022, the Beer Institute conducted a follow-up study that confirmed this harsh economic truth. It found that, even after granting exemptions to key suppliers like Canada, beer manufacturers were still required to pay full import tariffs on their can metal. At that point, the cost had reached $1.4 billion.

Import Dependency

Harbor Aluminum's conclusion that first-stage processing companies have benefited most from tariffs so far reflects the imbalanced nature in the U.S. domestic supply chain.

There are many semi-manufacturers in the country, but there are only four primary metal smelters that can supply them.

According to the U.S. Aluminum Association, more than 164,000 people are employed directly in the aluminium industry. However, only 4,000 of them are involved in upstream metal manufacturing.

These four smelters will produce 670,000 metric tonnes of metal by 2024, while the U.S. is only expected to consume 4.9 million.

Imports totaled nearly 4.0 million tonnes, with 70% of that amount coming from Canadian smelters.

It is hard to imagine that this dynamic will change anytime soon. Even if the idled smelting capacities of around 1 million tons per annum were to be brought back into production, a huge "if", given the age and cost structures of the four mothballed facilities, there would still be a large import dependency.

Century Aluminum has been working on a new smelter for years, but the company still doesn't have a reliable source of power at a competitive price to fuel the electrolysis process.

Tariffs will continue determining the final price for American buyers as long as imports are needed to meet the domestic demand.

Uncertainty in Trading

As the markets discovered on Tuesday, Trump can raise tariffs at his whim.

The fluctuating tariff rhetoric causes volatility in the CME U.S. Premium, which briefly rose to almost $1,000 per tonne over the LME Price on the threat to 50% tariffs on Canadian Metal before retreating after news of the truce between Ontario Premier Doug Ford and the United States.

It may also lead to a significant realignment in global trading patterns.

Prior spikes in U.S. aluminum premiums have pushed European premiums up. It is only logical that Europe, which also depends on primary metal imports to compete in the global marketplace for spare parts.

This time it's different. While the U.S. has seen its premiums soar to new heights, European premiums are falling.

It is not logical, especially since European consumers will lose Russian supplies over the next 12 months as part of the latest sanctions package. The European premium is more sensitive than ever to the North American market.

This divergence indicates that some US suppliers are looking to avoid Trump’s tariff tantrums and re-direct sales to Europe.

The European beer drinkers will benefit from this, as they can offer a can of aluminium to their American counterparts who are less fortunate.

(source: Reuters)