Base metals prices have been under pressure in recent weeks due to the looming trade war between the US and the rest of the world. Though imposing unilateral tariffs on Chinese aluminium, steel and many other goods was not a surprise per se, tariffs on steel and especially aluminium coming from U.S. allies, as well as the recent sanctions against UC Rusal (currently suspended until the end of October due to the unexpected harm they cause to companies from all over the world) have shown that President Trump is serious and determined to implement the “America first” motto.
The LME aluminium cash price has recovered to US$ 2135 /tonne (at press time), after touching the lowest levels since April of US$ 2071/tonne. Backwardation continues to push European premiums lower, which have reached 2018 lows in Rotterdam. Metal Bulletin assessed the Rotterdam P1020 duty-unpaid premium at US$80-90 per tonne in early July, down from US$90-100 per tonne the week before. The premium is now at its lowest level since September 2017, and has retreated significantly from the high of US$150-165 per tonne seen in April, when sanctions were announced against UC Rusal. In Japan, the third quarter MJP premium was settled at US$132 per tonne.
As fears grow that tariffs could erode global growth, with President Trump’s attempts to re-balance U.S. trade deficit and stimulate production on US land (above all else, steel and aluminium), targeted countries have retaliated to U.S. tariffs and sanctions – further increasing uncertainty. America’s escalating trade war is already hurting investment and threatens to undermine an otherwise strong business outlook, the Federal Reserve warned, citing industry contacts from around the country. Steel prices and aluminium premiums have risen in the U.S. in this year dramatically due to tariffs, threatening to wreak havoc on manufacturers.
Sanctions against UC Rusal, combined with supply disruptions in Brazil have inflated prices of alumina, which hit record highs of nearly US$ 800 /tonne. This has pushed up costs for smelters that buy alumina – including those on U.S. soil – and has provided incentives for those companies that make their own alumina, such as Alcoa, to sell more on the open market and direct less to their own smelters. At the same time, sanctions have caused a “chain reaction” hurting ‘smelters in Europe and around the world. As a result, sanctions were quickly put on hold until the end of October.
Ostensibly, the 25 % tariff on steel and 10 % on aluminium should protect the domestic production of the two metals. For primary aluminium producers however, this provides only symbolic support, as much of smelters’ profitability ultimately depends on long term electricity supply contracts and the all-in aluminium price (LME +premium). On that count, premiums have doubled so far this year, reaching 20.5 cents (US$ 452)/ pound.
Downstream pain postponed
So far, tariffs have been a godsend for US producers of steel and primary aluminium, and a blow for downstream manufacturers and consumers. However, as the Chair of the White House Council of Economic Advisers Kevin Hassett pointed out, concerns about U.S. steel and aluminium tariffs have not shown up in the latest job numbers. According to Hassett, employment actually increased in the downstream industries. Reports showed U.S. hiring exceeded June forecasts while the trade deficit in May was the smallest since October 2016.
The U.S. Institute for Supply Management (ISM) said its index of national factory activity jumped to a reading of 60.2 in June from 58.7 in May. A reading above 50 in the ISM index indicates an expansion in manufacturing. The Eurozone composite Purchasing Managers’ Index (PMI) slightly increased to 54.9 in June —down from 59.0 at the beginning of the year. China’s economic growth was expected to ease to around 6.6 % in the second half of this year, the State Information Center said. The official Purchasing Managers’ Index for the manufacturing sector in China declined more than expected to 51.5 in June, and Caixin’s PMI also fell slightly to 51.0. Managers in China are taking a decidedly gloomier attitude compared to their Western counterparts.
Next up, German cars?
Other than Section 232 tariffs on steel and aluminium, President Trump threatened last month to impose a 20% import tariff on all E.U.-assembled vehicles, causing panic among German automakers. German Chancellor Angela Merkel said she would back lowering European Union tariffs on U.S. car imports to Germany, responding to an offer from Washington to abandon threatened levies on European cars in return for concessions.
The US ambassador to Germany reportedly told German car executives that President Trump would agree to abandon such threats if both E.U. and U.S abolish their tariffs on each other’s cars. Currently, the U.S. import tariff rate on E.U-made is 2.5 % on cars and 25 % on trucks. The E.U. has a 10 % tariff on car imports from the U.S.
German automakers sold 1.35 million vehicles in the United States in 2017, about 8% of total U.S. car sales. Of those, only 494,000 were exported from Germany to the United States, 25% fewer than in 2013, according to the German carmakers association. Production of German automakers at U.S. based plants was 804,000 last year.
Given the stakes involved, it is clear now that there is no reason for fear or uncertainty. On the contrary, it is certain that the two sides will negotiate either a removal of tariffs or an equalized rate of 2.5%.
China production slumps
Production of most base metals was also affected in June by the central government’s environmental reviews. However, increases in the output of these metals in July are expected as inspections are expected to come to an end in early July. SMM forecasts the output of aluminium and alumina to come in at 3.13 million tonnes and 6.01 million tonnes in July, respectively, up 3.4% and 0.7% month on month. Production of primary aluminium in June amounted 3.021 million tonnes, 2.3% lower y/y and 1.7 % lower m/m. Production for 6 months (H1) was 17.809 million tonnes, 2.7% lower y/y.
Successful solutions in trade disputes (as in the case of import tariffs on cars between U.S and E.U., expected soon) would bring a strong stimulus to the markets and base metals prices.
The U.S. economic indicators are currently very strong and corporate earnings remain robust, while E.U. and China maintain slower but positive growth. In this economic environment, any news related to the solving of trade disputes will be a shot in the arm for markets and metals prices alike.
It’s true that some market players are worried because of the US import tariffs on Chinese goods worth a total of US$34 billion and China’s tit-for-tat retaliations. However, it’s expected that this and other trade disputes will be negotiated and adjusted in following months, and will not end up causing much economic harm. President Trump is definitely aware that trade relations built over decades cannot be resolved and rearranged in a year or two. More tariff exemptions and agreements (as with E.U. on car import tariffs) are expected to be seen in following months.
Relatively strong demand for most base metals and looming production disruptions (such as copper) will be supportive for the prices in H2 2018.
As for the aluminium price, aside of healthy demand, predominantly from the transport industry, production cuts in China due to the air pollution policy in last two months of the year, which should remove at least 1 million tonnes of annual production, would also be supportive of aluminium prices towards the end of the year. What’s more, the spectre of lower aluminium exports from China and Russia, as well as the possible reactivation of Rusal sanctions, there is not much reason for aluminium prices to fall in the second half of the year. Though it is not excluded that aluminium prices would temporarily fall in July or August, overall levels have room to grow in the last quarter of the year.