July 5, 2022

American steel and aluminum producers who sell into Europe will be the first to face the European Union’s proposed carbon border adjustment tax, according to Bloomberg Intelligence. According to the World Economic Forum, “A carbon border adjustment tax is a duty on imports based on the amount of carbon emissions resulting from the production of the product in question. As a price on carbon, it discourages emissions. As a trade-related measure, it affects production and exports.” As Bloomberg stated last Thursday, this tax will make imported metals products more expensive in Europe, and could also affect the prices for raw materials needed for steel and aluminum production.

This new tax could impact exports to Europe, and possibly lead to surpluses and lower prices of both metals here in the US.  Producers of either metal might consider hedges that provide downside protection. These might include applying simple hedges involving swaps to lock in a price or put options to establish a minimum price. One other possible strategy is a costless collar. In this case, a “zero-cost collar” creates a maximum and minimum price for a metals producer, as they would simultaneously buy a put option (creating a floor, or minimum) and sell a call option (creating a cap, or maximum). The call and put premiums offset, making the construction costless. It is popular because of the downside price protection, but you sacrifice access to much higher prices if prices should rise. Such positions are standard for producer hedging, but they can result in opportunity costs or cash costs if metal prices increase. Please contact AEGIS for specific strategies that fit your operations. (7/5/2022)

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Important Disclosure: Indicative prices are provided for information purposes only, and do not represent a commitment from AEGIS Hedging Solutions LLC ("Aegis") to assist any client to transact at those prices, or at any price, in the future. Aegis makes no guarantee to the accuracy or completeness of such information. Aegis and/or its trading principals do not offer a trading program to clients, nor do they propose guiding or directing a commodity interest account for any client based on any such trading program. Certain information in this presentation may constitute forward-looking statements, which can be identified by the use of forward-looking terminology such as “edge,” “advantage,” “opportunity,” “believe” or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities.