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20 June 2018

Aluminium Upsets



This article was written by Trevor Tarring. All views and opinions are strictly his own.

The situation in aluminium following President Trump’s unilateral declaration of import duties is producing the most chaos in this market for quite a long time. Indeed, I would suggest we have to go back to the early 1960’s and the Gentlemen’s Agreement to find its equivalent.

Under this oddly-named arrangement the western producers entered an annual contract to buy up an agreed amount of the surplus Russia wanted to press on the European market. They then absorbed it in their own vertically-integrated operations and ensured it was not visible in the market place. 

It must at once be admitted that the parallels between then and now are not exact. For starters, there was no Metal Exchange market in aluminium in the 60's – that only started in 1978. Then there were only six Western sellers of aluminium in Europe – Alcan, Alcoa, Pechiney, Alusuisse and the two wartime newcomers to the industry, Reynolds and Kaiser. OK, seven if you count Norsk Hydro. The Gulf industry was barely past the gleam in the eye stage and Australian bauxite was still in the future. There was also an element that disappeared with the establishment of aluminium trading on the LME – the Metal  Bulletin “certain other transactions” quotation which began in 1963, reflecting the level at which the Russian surplus was being sold in the market.

The Gentlemen’s Agreement was the personal triumph of Walter Rothbart of Brandeis Goldschmidt, a leading force in, above all, copper trading on the LME but with zero presence in aluminium. Curiously, this may have enhanced his credibility in the eyes of the aluminium producers as they began to realise they had a lot to learn about Wild West metal markets. Rothbart's trick was to index the Western producers' intake of Russian metal on the MB "certain other transactions" price. If any Russian or satellite metal crept round the edges of the Gentlemen's Agreement, the "certain other transactions" quote reflected it and the whole boiling of Russian exports suffered accordingly.

For the ten successive years of its existence the Gentlemen’s Agreement largely kept the visible pressure of the surplus metal from Russia and its satellites off the European market. One of its striking features was that each contract was strictly annual and only verbal. In this way the prying eyes of US (or even, eventually, EU) trust-busters were given a very hard job to find out what was happening. 

The producers maintained the fiction of the producer price structure that had prevailed from the beginnings of the electrolytic aluminium market for their vertically-integrated business, while the Metal Bulletin “certain other transactions” quotation told the truth about the levels that prevailed on the open side of the market. In effect, both sides of the Agreement were price-takers, while the Western producers, when they cut back their own ingot production to accommodate the Russian metal, were in effect the swing producers.

It is easier to spot the differences between the foregoing narrative and today's US tariff decision than the similarities - except in terms of the event's impact on the market. Certainly the "market" that was being read by the "certain other transactions" quotation was a different affair from that being read by the LME today. The former was segmental and the product of artificial elements in the background, whereas the LME is all-encompassing and its price universally accepted. But the creation of an artificial US domestic market behind the Trump tariffs does have parallels with the impact on the European market of the Gentlemen's Agreement. Given the latter's ten year lifespan, is that an omen for the duration of the Trump import duties? It's not impossible. 

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