By Pratima Desai and Nichola Saminather
LONDON/TORONTO (Reuters) - Canada's exemption from U.S. tariffs on imports of aluminum metal has boosted earnings at the Canadian operations of companies such as Rio Tinto and Alcoa, but has not cut costs for U.S. consumers.
In May, the United States lifted the Section 232 tariff of 10% imposed on Canadian imports of aluminum, a vital ingredient for auto makers, drinks firms and military equipment companies.
Aluminum costs for U.S. consumers are the benchmark price on the London Metal Exchange at around $1,810 a tonne plus the physical market premium, around $400 a tonne.
Analysts say $192 of the premium is the tariff non-exempt producers pay.
"About 70% of U.S. aluminum demand can be met without paying import duties, yet 100% is pegged to the duty payable," said Citi analyst Oliver Nugent, adding the bank's estimate for U.S. aluminum demand this year was 5.57 million tonnes.
"Canadian producers are making good margins on physical premiums. It's a negotiated market and up to consumers to push the premiums down. The surprising thing is that there isn't a two-tier structure. One tier for producers that pay duties and another for those that don't."
Aluminum is used to make cans and extrusions, which are solid, semi-hollow and hollow shapes for home appliances and auto makers. Higher costs are either passed through the supply chain or absorbed by end consumers.
"It was disappointing that premiums didn't come down," a source at an aluminum consumer in the United States said.
"Problem is, if you try to differentiate on where your aluminum comes from, it creates winners and losers, we should just lose the tariffs."
HIGHEST COST SUPPLIER
Rio Tinto and Alcoa are the two largest producers in Canada. Rio produced 1.884 million tonnes of aluminum in Canada last year, while Alcoa's North American operations have capacity to produce 1.674 million tonnes.
"Now that Canada is exempted from the 232 tariffs, we would anticipate an annual benefit of approximately $200 million from the 232 tariffs," said Alcoa chief financial officer William Oplinger at a briefing on July 17.
Rio Tinto declined to comment.
Other exempt countries include Argentina, Australia and Mexico which are estimated to account for nearly 10% of aluminum going to the United States.
Global aluminum demand is estimated at 67 million tonnes this year.
"The U.S. needs metal from Russia, the Middle East and India to satisfy local demand, the price is determined by the highest cost supplier," said CRU Group analyst Eoin Dinsmore.
Highest cost suppliers are those who have to pay the tariff.
Costs of exporting aluminum to the United States include insurance, shipping and trucking from port to manufacturing hubs in the Midwest.
"U.S. Midwest premiums will always be higher than Rotterdam port, there is a big chunk of inland freight. It costs about $75 (a tonne) to get it to the Midwest, the place it's priced for," CRU's Dinsmore said.
Physical market premiums in Europe at $95 a tonne are up nearly 60% since the start of January, due to aluminum tied up in financing deals and collateral for loans.
Financing deals involve buying aluminum now and selling it forward for a higher price and profit after storage and interest costs have been deducted.
(Reporting by Pratima Desai and Nichola Saminather in Toronto; Editing by Veronica Brown and Emelia Sithole-Matarise)