Analysis: How U.S. aluminium recyclers reap dividends from tariffs
19/03/2020 13:02
* 86% of aluminium used by U.S. drinks firms is tariff free
* Only 14% or $81 million went to U.S. government
* S&P Global Platts says its methodology is transparent
By Pratima Desai
LONDON, March 19 (Reuters) - North American aluminium
recyclers and producers are using import tariffs to boost
revenue at the expense of local beer and beverage firms, even
though most of the metal used in their cans is not subject to
the levy, industry data seen by Reuters show.
Recyclers such as Novelis, a subsidiary of India's Hindalco
HALC.NS , and Japanese-owned Tri-Arrows 5741.T 8053.T
8001.T , are charging a duty paid price for aluminium, which at
the end of January was more than $180 a tonne above the duty
unpaid price, according to data from S&P Global Platts.
Meanwhile, data from consultants Harbor Aluminum shows about
70% of aluminium in the cans used by U.S. drinks firms is
recycled locally and free from import taxes, while another 16%
comes from domestic and Canadian smelters, which are also exempt
from the tariffs.
Harbor also estimates drinks firms paid $582 million more
for approximately 3 million tonnes of metal they consumed
between March 2018 and December 2019 than they would have if
there were no tariffs.
Some $81 million of that went to the U.S. government, while
the lion's share of $428 million went to recyclers, which also
typically produce the aluminium sheet that companies such as
Ball BLL.N and Crown CCK.N turn into cans.
Aluminium accounts for about 65% of the total costs for U.S.
drinks firms.
"Over the last 24 months it has cost both Wis-Pak and its
shareholders more than $6 million in increased costs," said
David Bauer, President of Wis-Pak, a cooperative of family-owned
independent Pepsi franchise bottlers.
GLOBAL BENCHMARK
Prices of aluminium in the United States are based on a
global benchmark, which is a contract on the London Metal
Exchange (LME). Consumers pay the LME price plus the benchmark
duty paid Midwest premium, assessed by S&P Global Platts and
based on bids, offers and traded prices gathered from traders,
consumers and producers.
The premium typically covers transport and handling costs
and, since March 2018, a 10% tariff on imports of aluminium
imposed by the administration of President Donald Trump.
S&P Global Platts also provides an implied duty unpaid
premium, which recycling firms, UK-listed Rio Tinto RIO.L
RIO.AX and U.S-listed Alcoa AA.N with smelting facilities in
Canada are declining to use.
Local producers such as Century Aluminum CENX.O , in which
London-listed miner Glencore GLEN.L has a 40% stake, are also
declining to use the duty unpaid price.
The duty unpaid premium since S&P Global Platts started to
publish it in August 2018 has on average been around $190 a
tonne below the duty paid premium, more than 10% of the LME
aluminium price CMAL3 currently near $1,600 a tonne.
"There's no premium for the corn and sugar we buy locally to
sweeten our products, so why should there be one for aluminium?"
said Kelly Clay, chief executive of Admiral Beverage, the
fifth-largest Pepsi bottler in the United States.
Producers in Canada earned $29 million by charging for
tariffs they did not pay between March 2018 and July 2019, while
local smelters saw a revenue boost of $44 million, according to
Harbor's estimates.
Alcoa, Century Aluminum, Tri-Arrows, Ball and Crown did not
respond to requests for comment, while Rio and Novelis referred
Reuters to the Aluminum Association.
"We are genuinely bewildered by recent attempts to pressure
aluminium suppliers to change the pricing methodology that has
evolved through market forces ... for more than 25 years," said
the Aluminum Association's Lauren Wilkes.
U.S. aluminium consumption, mostly in the transport and
packaging industries, is estimated to have totalled more than 10
million tonnes last year, about 15% of global demand.
WINDFALL PROFIT
Drinks firms say import levies have changed the environment.
"We met with all our suppliers and asked to pay duty that is
reflective of where the aluminium comes from, but we got
nowhere," Pete Coors, Vice Chairman of Molson Coors, said.
"These firms have monopolistic control to exploit aluminum
tariffs and create windfall profit at the expense of end users
by raising their prices to match tariff prices."
Drinks makers want the U.S. system to be reformed so that
aluminium producers and recyclers cannot include the cost of
tariffs in their prices unless they actually pay them.
But recyclers and producers have declined to do this.
"Unfortunately, we've been left with no other alternative
but to request a federal investigation into U.S. aluminum," said
Admiral Beverage's Kelly.
S&P Global's head of pricing Dave Ernsberger said in
response: "Platts publishes every data point including bids,
offers and trades that underlie our assessments for all the
market to see and comment on ... our benchmark methodology is
transparent."
To facilitate an investigation, the Aluminum Pricing
Examination Act (APEX) sponsored in Congress by Democrat Al
Lawson and Republican Ken Buck and in Senate by Republican Cory
Gardner and Democrat Tammy Baldwin was introduced last year.
The APEX act would give the Commodity Futures Trading
Commission oversight over the benchmark premium.
Former CFTC Chair Christopher Giancarlo said at a hearing
last year that users were concerned, but "not from the point of
view of manipulation", but whether the construction of the
Midwest premium was accurate.
Ernsberger said in January "the CFTC already has the
authority to oversee the aluminium market and investigate
manipulation" and that "the APEX Act is misguided legislation".
He added that the beer industry "has failed for over 18
months to provide any evidence of wrongdoing".
The Aluminum Association's Wilkes said: "The association is
happy to cooperate with any fair and independent government
oversight of the industry."
(Reporting by Pratima Desai; Editing by Veronica Brown and
David Evans)
((pratima.desai@thomsonreuters.com; +44 207 542 5113;))