Opinion pieces are the views of the author: they do not represent the views of FastMarkets
Center Valley, Pennsylvania 08/07/2016 - The unsustainable flow of primary aluminium imports into the US will slow in the second half of the year because of a lower Midwest premium and stronger Russian and Canadian currencies.
Still, hundreds of thousands of tonnes of cheap aluminium now sits on boats or in US ports and warehouses, which is a major problem considering the market has entered the summer doldrums.
We believe that it will take several months to consume all of this excess supply, even if imports fall back to more typical levels, which will keep a lid on near-term premiums.
The first four months of this year were a perfect storm - imports of crude aluminium and alloy rose 19 percent to 1.37 million tonnes over that period, according to the US Geological Survey (USGS).
The primary catalyst was the collapse in energy prices to start the year. On January 20, light sweet crude (WTI) oil futures on the New York Mercantile Exchange settled at a 13-year low of $26.55 per barrel.
This not only made it much cheaper for producers to smelt aluminium but it also crushed the currencies in oil-sensitive countries such as Russia and Canada, which are the US' biggest foreign suppliers of aluminium.
On that very same day, the rouble collapsed to its lowest ever at 82 per dollar while the loonie fell to 1.44 per dollar - the cheapest since April 2003.
The Russians and Canadians took advantage of this currency arbitrage by exporting massive amounts of aluminium to the US from January.
Russia exported 226,000 tonnes to the US in the January-April period, an increase of 71 percent year-on-year and nearly as much as the 279,000 tonnes it exported in all of 2015, according to a FastMarkets analysis of USGS data.
While not as dramatic, Canadian cross-border shipments rose to 744,000 tonnes in January-April, up six percent year-on-year, due to the soft Canadian dollar earlier in the year and higher production levels.
Meanwhile, there were also demand-side factors inside the US that encouraged imports. For the past year, the US has been the undisputed best market for aluminium demand due to a booming auto industry and a recovery in building and construction.
Since December, the US Midwest aluminium premium on average has been about 4.5 cents per pound or $100 per tonne higher than the Rotterdam duty unpaid premium. This wide spread has encouraged metal to be diverted to the US.
This explains why exports from the United Arab Emirates (UAE) to the US rose to 185,000 tonnes in the first four months of 2016, which was an 81-percent year-on-year increase, according to the USGS.
The Middle East in recent years has emerged as the world's key swing supplier, with its metal generally flowing to whichever region has the highest physical premiums. And the US has been the most profitable landing spot for an extended period.
LOOKING AHEAD
But conditions have changed since January, which we believe will slow down the pace of imports.
First, oil prices have bounced back - this has led to a 21-percent rally in the rouble over the past six months. The Russian currency was last at 64.36 per dollar.
Likewise, the Canadian dollar has rallied - it is now at 1.30 against the US dollar, an improvement of 10 percent from the January lows.
So while the US dollar is still strong in historical terms, there is no longer the same incentive to sell anything and everything to end-market consumers here.
So we expect a significant pullback in Russian export levels while Canadian exports should be steady to modestly lower.
Second, US premiums have recently come under downward pressure due to this wave of imports. This week, the US Midwest aluminium premium slid to a fresh five-year low of 6.9-7.25 cents per pound.
Sub-seven-cent premiums could discourage some imports; however, European and Japanese premiums also remain weak. So for now there is no clear-cut best location to send excess aluminium supply.
Rotterdam duty-unpaid premiums were stable this week at $65-75 per tonne while spot rates in Japan, South Korea and Taiwan were just $80-90 per tonne on a cost, insurance and freight (CIF) basis.
The spread between the US Midwest and Rotterdam DUP premium currently stands at about $85 per tonne - still wide enough for some metal to be diverted to the US but it's no longer the same slam-dunk, no-brainer trade that existed when the differential was more than $100 per tonne for much of the early part of the year.
So we expect import volumes to pull back slightly in the second half. But this doesn't mean that the US is out of the woods yet because there's still a lot of inventory that needs to be consumed.
Additionally, demand and premiums in Europe and Japan are still fairly lacklustre, which means that the US remains a comparatively attractive option for producers.
Because of this, the US Midwest premium is likely to struggle to rise much above 7 cents per pound until at least the fourth quarter of this year.
(Editing by Mark Shaw)