Deutsche Bank sees mixed impact from potential US-Canada tariff cut

Investing.com -- Deutsche Bank analysts said a potential trade agreement between the US and Canada could reduce import tariffs on Canadian aluminium from 50% to 25%, creating varied effects across the aluminium sector.

Multiple sources indicate the two countries are close to reaching a deal focused on lowering steel and aluminium tariffs, a priority for Canada. The US remains structurally dependent on aluminium imports, having sourced about 80% of its primary aluminium needs from imports before tariffs took effect in early 2025, with roughly three-quarters coming from Canada.

The bank expects lower tariffs would reduce US Midwest premiums, which currently stand at 107 cents. The premium has stayed above levels implied by the 50% tariff due to global supply constraints from the US-Iran conflict. Canadian imports would likely increase under lower tariffs, easing supply tightness. The marginal tonne entering the US would continue facing a 50% tariff, suggesting premiums might only fall to around 80-90 cents at current LME prices.

European premiums could see modest support as more Canadian metal flows to the US instead of Europe, though the bank notes European premiums have been declining from elevated levels on expectations of improved Middle East supply.

Canadian producers including Rio Tinto (LON:RIO) and Alcoa would benefit from reduced tariff costs while premiums remain elevated. Rio Tinto's attributable primary aluminium production reaches 3.3-3.4 million tonnes per year, with approximately 65% from Canadian smelters. Deutsche Bank estimates the tariff reduction could increase Rio Tinto's group EBITDA by around 3%.

US domestic smelters would face headwinds from lower Midwest premiums. Norsk Hydro (OSL:NHY), with significant US extrusions and recycling operations, could see group EBITDA reduced by NOK 1-2 billion as recycling spreads normalize.

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