US Aluminum Trade Deals: Uncertainty Ahead

The Aluminum Monthly Metals Index (MMI) rose 0.85% in August, but the pace slowed due to uncertainty surrounding US aluminum trade deals. The Midwest Premium hit a new all-time high of $0.71/lb, a 167% increase since the start of the year. However, the premium's three-month futures contract peaked in late July and investors are cautious about its next leg up. Industry estimates for the premium's peak range from $0.70/lb to $0.75/lb, but the futures market is reluctant to push higher due to ongoing trade negotiations with leading suppliers.

President Donald Trump doubled U.S. tariffs on steel and aluminum imports from all U.S. trade partners to 50 percent on June 4, 2023. The United Kingdom remains at 25 percent, pending the outcome of their trade deal with the U.S. The White House justified these tariffs as a crackdown on subsidized metals from China, which it argued flooded global markets and harmed U.S. producers. These tariffs were imposed under section 232 of the Trade Expansion Act of 1962, which has firmer legal ground than the broader April 2 tariffs [1].

The broader U.S. economy is expected to face limited consequences from these tariffs. Bloomberg Economics predicts they will shrink GDP by just 0.15% and boost U.S. consumer prices by 0.1% over the next three years. However, steel-using industries will face higher prices, lower margins, and potentially lost jobs if costs cannot be fully passed through to consumers [1].

The U.S. depends on foreign partners for much of its aluminum supply. About half of its aluminum comes from abroad, with Canada being the top supplier. Electronics, aerospace, and defense manufacturers rely heavily on imported aluminum for purity and consistency standards. A 50 percent tariff will further strain the U.S. defense industrial base at a time of mounting military threats [1].

The U.S. relies less on imported steel, with domestic mills producing about three-quarters of the steel used. However, many industries, such as aerospace, auto, construction, and energy, depend on foreign sources for specific types of steel. An added tax would drive up costs for American oil producers and other sectors [1].

The tariffs are likely to boost steel prices, benefiting U.S. producers and potentially adding to the industry's 140,000 jobs. However, job gains will likely be offset by losses in manufacturing and other industries that rely on steel. In 2018, steel-using sectors of the economy employed more than twelve million Americans, with nearly two million working in steel-intensive industries. Research estimates that Trump's 2018 tariffs led to the direct loss of seventy-five thousand manufacturing jobs [1].

Higher steel and aluminum costs will hit industries like construction, auto, packaging, appliances, machinery, oil and gas, and electrical equipment the hardest. Aluminum makes up around 80 percent of an airframe's weight and a quarter of Coca-Cola packaging, meaning tariffs could make American planes and drinks pricier on the global market. Building a car takes about half a ton of steel, so a 50 percent tariff could add over $2,000 in production costs per vehicle [1].

General Motors (GM) has secured new supplier agreements to ensure it has the raw materials needed to meet its goal of building 1 million electric vehicles in North America by the end of 2025. GM has binding supply agreements with LG Chem, Livent, and POSCO Chemical for lithium, nickel, cobalt, and Cathode Active Material (CAM) used in EV batteries [2]. These agreements will provide GM with the materials necessary to build 5 million EVs by 2030.

The Aluminum Monthly Metals Index (MMI) rose 0.85% in August, but the pace slowed due to uncertainty surrounding U.S. aluminum trade deals. The Midwest Premium hit a new all-time high of $0.71/lb, a 167% increase since the start of the year. However, the premium's three-month futures contract peaked in late July and investors are cautious about its next leg up. Industry estimates for the premium's peak range from $0.70/lb to $0.75/lb, but the futures market is reluctant to push higher due to ongoing trade negotiations with leading suppliers [1].

Companies and governments will continue to seek exemptions for their products. Unlike during his first term, Trump has granted few exemptions since February. The United Kingdom is the only close partner to have received one, and other major trade partners now face the full 50 percent duty unless exemptions are forthcoming [1].

Ongoing U.S. court challenges will add complexity and uncertainty to dealmaking. Until the courts resolve the legality of these tariffs, the parameters for countries seeking relief will remain murky, leaving major trade partners in limbo even as export costs climb [1].

References:

[1] https://www.cfr.org/article/trumps-new-aluminum-and-steel-tariffs-explained-six-charts

[2] https://www.freep.com/story/money/cars/general-motors/2022/07/26/general-motors-electric-vehicles-materials/10146847002/