Morgan Stanley sees modest downside risks to US aluminum premium

Investing.com -- The United States is considering reducing import tariffs on Canadian aluminum to 25% from 50% as part of a potential trade agreement, according to people familiar with the matter. The deal has not been finalized.

Morgan Stanley analysts noted that even with reduced tariffs on Canadian imports, the US would remain short of its aluminum supply needs. The marginal ton would still enter the country at the 50% tariff rate.

The US relies on imports for approximately 80% of its aluminum demand, with Canada serving as its largest historical supplier. In the first half of 2026, the US imported 1.68 million tons, or 280,000 tons per month, while Canada exported 1.16 million tons, or 192,000 tons monthly on average, representing 68% coverage.

Canada has shifted more metal exports to Europe following the introduction of US tariffs. Even if all Canadian exports, or its entire production, were directed to the US market, this would fall short of total US requirements.

Before tariffs, Canadian exports averaged 240,000 tons per month, which would cover only 85% of current US import levels.

The US aluminum tariff relief mechanism allows tariff discounts for companies expanding capacity. This could bring additional volumes at lower tariffs, particularly from the United Arab Emirates, where EGA and Century are planning a 750,000 ton per year smelter.

The Midwest Premium has traded approximately 30% above the implied tariff cost. With Canadian metal able to enter Europe duty-free, the premium has covered the opportunity cost of not sending metal to Europe, where premiums have also been strong.

Morgan Stanley analysts said a lower US tariff on Canada could reduce this competition, potentially weighing on the Midwest Premium. The bank estimates the premium could decline by about half of its premium to the fair value of tariffs, around 10-12 cents per pound, if the tariff cut is implemented.

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