Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / Why Aluminum Tariffs Are Reshaping Global Metal Flows
Transcript
- Lucas: So you look at the broad commodities board this week — copper down four percent, wheat off six, silver getting absolutely hammered — and then you see aluminum. LME aluminum, the global benchmark, down about three and a half percent over the last five sessions. Nothing remarkable. Luna: But that's not the whole story. Lucas: Not even close. Because if you're a manufacturer in the Midwest buying physical aluminum right now, you're paying a premium over LME that's gone from about 30 cents a pound in January to 45 cents a pound as of this week. That's a 50 percent jump. Luna: And that premium is essentially the tariff. The 25 percent import duty on aluminum hasn't changed, but what's changed is how the market is absorbing it. Lucas: Exactly. So let's rewind. The 25 percent tariff on aluminum imports under Section 232 has been in place for years, but there were always exemptions — Canada, Mexico, the EU, a bunch of countries had quota deals. In early 2025, the administration started tightening those exemptions. By the start of this year, most of the Canada quota was gone, and Canada supplies about 60 percent of US primary aluminum imports. Luna: So suddenly the cheapest source of metal for US buyers just got 25 percent more expensive. Lucas: Right. And the market response has been fascinating. Because LME prices are set globally — they reflect supply and demand in Europe, Asia, the Middle East. That's why LME aluminum is only down about three percent. But the physical market in the US is now effectively decoupled. Luna: So you've got two different aluminum markets. One global, one American. And the American one is much more expensive. Lucas: And the spread is creating all kinds of weird incentives. US smelters that had been idled for years are starting to fire back up. There's a smelter in Washington state owned by a company called Alcoa — they announced in April they're restarting a potline that had been offline since 2015. Luna: That's a big deal. Restarting a smelter is not like flipping a switch. It takes months and millions of dollars. Lucas: Yeah. But at a 45-cent Midwest premium, the math works. Alcoa can produce aluminum in the US, sell it at that premium, and make money even if LME prices fall further. So you're seeing a mini-renaissance in domestic smelting — but it's small. The US only produces about 0.8 million tons annually, versus consuming over 5 million. So we're still dependent on imports. Luna: And the countries that still have quota access — like the UAE, Bahrain, some of the Middle Eastern producers — they're capturing that premium. They're selling into the US at the higher physical price. Lucas: Which is why you've seen a shift in trade flows. Middle Eastern aluminum that used to go to Europe is now being diverted to the US. European buyers are having to pay more to attract metal from other sources. So the tariff isn't just affecting the US — it's rippling through the global supply chain. Luna: And the downstream impact? I'm thinking about beverage cans, car parts, window frames — all the things that use aluminum. Lucas: Yeah, that's the part that doesn't get enough attention. The Midwest premium is passed straight through to buyers. So if you're a can manufacturer in Chicago, your input cost just went up 15 percent this year. Some of them are stockpiling — building inventory now in case the premium goes higher. Luna: Which itself drives the premium up further. You're creating a self-reinforcing cycle. Lucas: Exactly. And there's a parallel with what we saw in lumber during the pandemic. Spikes in input costs that eventually hit consumer prices. But aluminum is more embedded in the industrial economy. It's in everything from iPhones to F-150s. Luna: So what breaks the cycle? A recession would crush demand and lower the premium. But nobody's forecasting that. More quotas? Domestic capacity increases? Lucas: I think the most likely near-term pressure is that the political calculus might shift. If the premium stays above 50 cents and starts showing up in inflation data — the CPI for goods, for example — you could see pressure to loosen the tariff or expand exemptions. But that's a big if. Luna: Speaking of calculus, we should mention something here. This episode — and all our episodes — are made possible by listeners who chip in a few bucks a month. Lucas: Yeah. It's a small group, but it's what keeps the show ad-free and lets us spend the time to dig into stuff like aluminum premiums instead of just reading headlines. If you've gotten something out of the episodes, you can join them at buy me a coffee dot com slash fexingo. Luna: And honestly, every bit helps. Okay, back to aluminum. Lucas: So let's talk about what happens next. There's a report out from Harbor Aluminum that says the Midwest premium could hit 55 cents by the end of Q3 if import volumes don't pick up. That would be a record. Luna: And what about the LME side? If the US is paying more for physical, but global demand is softening — you mentioned copper and wheat are down — does LME aluminum get dragged lower? Lucas: It's possible. Global demand, especially from China's property sector, is weak. Chinese aluminum exports have been rising too. So the global market is actually a bit oversupplied. That's why LME prices have been drifting down. But the US premium is a separate story. Luna: So you have a split market: global weakness, US tightness. That's unusual for a commodity that's typically global. Lucas: It is. And it creates arbitrage opportunities — traders can buy LME aluminum, ship it to the US, pay the tariff, and still make money if the premium is high enough. That's happening. But it takes time, and shipping capacity is limited. Luna: So the tariff is effectively a tax on US manufacturers that gets passed on to consumers, while also providing a lifeline to a few domestic smelters and foreign producers with quota access. Lucas: That's the trade-off in a nutshell. And the question is whether the long-term benefit — a more self-sufficient US aluminum industry — is worth the short-term cost. We're living through the experiment right now. Luna: And the data says the premium is still climbing. So we'll keep watching. Lucas: Yeah. For now, if you're buying aluminum for your business, you're paying a lot more than the LME screen suggests. And that gap tells you more about trade policy than about global supply and demand.