MATERIALS OUTLOOK

U.S. Tariffs on Russian Aluminum

by Royce Lowe

At the beginning of the year, nobody was sure whether the U.S. and its allies would levy sanctions against Russian aluminum over the ongoing war in Ukraine. Russia’s aluminum industry is a key part of its defense industrial base. It is also one of the world’s largest producers of the metal. The U.S. and its allies imposed several economic measures against Russia after it invaded Ukraine a year ago but did not target aluminum.

prices soaring. Hence the aluminum market was anxious about 2023.

In late February, their anxiety was answered when the U.S. announced the imposition of a 200% tariff on Russian aluminum. The 200% duty will further apply to aluminum imports from elsewhere, including Russian aluminum. The tariffs were part of a larger package of trade enforcement moves against Russian metals, minerals, and chemicals worth about $2.8 billion, announced on Russia’s invasion’s one-year anniversary. Tariffs usually lead to higher prices, but the impact of this latest action against Russian aluminum will not be as serious as it may have been. The tariffs were not as punitive as other measures the White House considered, such as a total ban on imports of Russian aluminum and renewed sanctions on Rusal.

The tariffs are unlikely to tighten aluminum supplies in the U.S., as users have lessened their reliance on Russian aluminum since 2017. Russia, primarily through Rusal, accounted for some 11% of U.S. aluminum imports at that time. This share dipped to about 4% of import volume last year.

In 2018, the U.S. sanctioned United Co. Rusal, a major Russian aluminum producer, as a response to Russian aggression, including meddling in U.S. elections. This froze the bulk of the company’s exports, disrupted the aluminum market, and sent aluminum continued

Demand for the metal is playing a major role here, as prices of the metal on the London Metal Exchange, the international benchmark, have fallen about 30% from a year ago and remain under pressure.

Global prices have been unstable since the pandemic. They began a steady climb in mid-2020, as economies slowly reopened following pandemic lockdowns and improving industrial demand. The growth of electric vehicles and renewable energy has also increased demand.

In early 2022, commodity prices surged on supply concerns in the days and weeks leading up to Russia’s invasion of Ukraine. Prices continued rising after the start of the war as the U.S. and other western nations brought economic sanctions against Russia. The U.S. did not initially target Russian aluminum, but the sanctions and the war led to increases in many commodity prices. Aluminum prices soared more than 30% in the first quarter of 2022.

Since peaking in March 2022, prices have tumbled. As some key buyers shunned Russian supplies, aluminum inventories began growing. Meanwhile, China, the world’s largest aluminum producer, kept its smelters going and added to the oversupply.

According to the International Aluminum Institute, despite production cuts in Europe and the U.S. due to high energy costs, worldwide aluminum production rose 2% last year, to 68.5 million tons.

Coincident with the rise in global production was worries about an economic slowdown, hence a weakened demand for the metal. There were problems with Europe’s energy crisis and inflation - rising interest rates causing recession fears. In addition, currency fluctuations have hurt aluminum prices. The Federal Reserve’s aggressive interest rate hikes to combat inflation have strengthened the U.S. dollar relative to other currencies. As metals are priced in dollars in international markets, the strong dollar makes aluminum more expensive for holders of other currencies.

Since there has been no significant improvement in economic conditions this year, the outlook for aluminum is not likely to improve. A 3%-5% drop in the metal price is expected early in Q2, because of an expected monthly rise in inventories at the London Metal Exchange. Further, the global manufacturing scenario, with the exception of India, is in contraction. There is a lack of demand.

Prices may rise if Europe follows the U.S. in imposing tariffs on Russian aluminum or even stops importing it. The E.U. is more dependent on Russia for its aluminum supplies than is the U.S., as Russia accounts for about 13% of the E.U.’s imports. Supplies are already tight in the E.U. after smelters in the region shut down production because of soaring energy prices. So the war in Ukraine and further trade actions by Western nations will continue to greatly affect the aluminum market.

Russian retaliation against the U.S. import tariff could well lead to Russia playing havoc with its nickel exports to the U.S., or some 11% of U.S. imports. Who knows where this could all lead?

Author profile: Royce Lowe, Manufacturing Talk Radio, UK and EU International Correspondent, Contributing Writer, Manufacturing Outlook. n