Long-term contracts could insulate US mills from tariff volatility – analyst

Long-term contracts with canmakers could insulate US rolling mills from some of the volatility tariffs on imports of aluminium and steel could bring if implemented by President Donald Trump, one analyst has suggested. 

Earlier this month Trump said he would impose a flat 25% tariff on aluminium imports “without exceptions or exemptions” in a move aimed at lifting US production of the metal used to make cans, automobiles, and other products.

The threat has set the nation’s canmaking industry on edge, with one company warning such a move would cause it to raise prices and at least one major filler saying that higher can costs could force it to put more of its product into plastic bottles.

Manufacturers that import the metals into the country, including canmakers, will be forced to pay a 25% surcharge from 4 March if Trump follows through with his protectionist plans. That has led investors to push up the price of the aluminium traded on the London Metal Exchange. The price of Midwest Premium aluminium, the benchmark for the metal sold in the US, has risen by two-thirds this year on the back of fears over Trump’s plans (USD774).

Matthew Abrams, senior analyst, aluminium, CRU Group, told The Canmaker that contracts between canmakers and rolling mills can often be anywhere from five to 10 years long. “It will insulate the [mills] from some of the volatility we might see.”

With long-term contracts, canmakers have a quota they have to take yearly with pricing, comprising LME (London Metal Exchange), plus Midwest Premium, plus a conversion fee. The Midwest and LME combine to make up the Midwest Transaction Price, which is the part of the contract that moves each month. 

“The tariffs usually flow through immediately to the premium and in this case have essentially doubled it from 20¢-ish to end 2024 up to 40¢-ish currently,” Abrams explained.

“Traditionally the canmakers have passed through this cost, but they might start to feel the squeeze if beverage brands push back. They are also already under that LT contract with the mills so they have to take those volumes at these prices. So they could be the part of the supply chain that gets squeezed alongside the beverage brands.”

And the consumer will not be immune to these effects. “The end consumer does bear a lot of that cost at the end of the day,” Abrams added. “It gets pushed down all the way to them. And I feel like we’ve learned in 2023 specifically that the end consumer is pretty sensitive to price.” 

Further volatility may come as some contracts are set to be renewed over the next 12 months or so, according to Abrams, along with the addition of two new rolling mills (Novelis and Aluminum Dynamics) that will generate “extra contracts”. 

Aluminum producer Alcoa voiced its concern this week that the tariffs could cost about 20,000 US aluminium industry jobs and an additional 80,000 in the sectors that support it.

The challenge with the tariffs, however, according to Abrams, is that they could change overnight. “We’ve seen it before. They’re technically still not even in place yet. We still have almost two weeks until they hit, so anything could change before then. Most of the canmakers are probably pretty insulated, just because most of the smaller companies have left the market.”