February 7, 2023

The current 35% tariff on imports of Russian aluminum into the US could jump to 200%. AEGIS notes that Russia was the sixth-largest supplier of aluminum to the US in 2022; however, this move could effectively shut off imports from Russia. According to Bloomberg, the Biden administration had been considering the tax hike for several months but had never implemented it due to “collateral damage on US industries.” However, as the Russia-Ukraine conflict nears its one-year anniversary, the Biden administration could increase economic and political pressure on Vladimir Putin. The US imported approximately 194,000 mt of aluminum from Russia last year, down from 207,000 mt in 2021. In both 2021 and 2022, Russian volumes were approximately 3% of US aluminum imports. (Sources: Bloomberg, US Dept. of Commerce)

AEGIS notes that the proposed tariff could impact aluminum prices here in the US, specifically that of the MWP. If Russian supplies drop to near zero, then US importers will need to fill the void by purchasing from other suppliers. To entice cargoes that would otherwise go to other major aluminum importers, American buyers will likely need to bid up import premiums into the US. This has already occurred before, as CME MWP prices surged after the onset of the Russia-Ukraine conflict. In fact, in late March and April 2022, the CME MWP kept climbing as global (LME) aluminum prices were falling.

Please note the spot CME MWP prices have already rallied over 40% this year, mainly due to shortages of high-purity aluminum in Europe. As we have suggested, the MWP could rally further if Russian supplies into the US evaporate. However, American aluminum end-users can mitigate this price risk by hedging with CME MWP swaps. The forward curve is now backwardated through April 2023, but then largely goes flat beyond that contract. This means that end-users can hedge future usage at a discount to spot prices. Please note that there is no options market for the CME MWP. The CME Midwest Premium swap market is thinly traded, so hedging in that market is tricky. Thus, we recommend using limit orders. Please contact AEGIS for specific strategies that fit your operations. (2/7/2022)

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