Are aluminum markets disrupted by tariffs? Probably not.

[Jan van Eck + 7,558]

Continuing my sequence of Postings on the effects of the Trump tariffs, we now take a peek at the situation in aluminum.  Readers will recall that when the aluminum and steel import tariffs were proposed, steel was tentatively set at 25% and aluminum at 10%.  Also, the proposed tariffs did not go into effect immediately, but took two months to start after the announcement. 

Now, why would aluminum be set at the reduced rate, and what influence has it had on US aluminum production  (and on industrial purchasers of aluminum)?  First, it should be remembered that the US  (domestic) aluminum industry has little (if any) spare production capacity.  Aluminum is produced from bauxite ore, and the smelting process demands staggeringly huge amounts of electricity.  You find that level of power from dedicated hydroelectric dams.  Hydro is cheap enough once the dam capital costs are spent; it is just water flowing down a pipe and through a turbine turning that generator.  In the USA, the massive amounts of hydro are found at Buffalo - Niagara Falls, where all the waters from the Great Lakes flow over the Niagara Escarpment and down to Lake Ontario, a drop of 177 feet.  And out West you have those volumes in the Columbia River (between Oregon and Washington), where the sheer volume makes up for lower vertical drops.  Those locations have cheap power. 

In competing Canada, the preferred power source is the drop off the Canadian Shield, a massive plateau that stretches across the top of Quebec, from the coast of Labrador to Hudson's Bay.  The original smelters were set up on the Saguenay River, allowing for stupendous smelting operations. And anywhere else in Canada where you had water drops, the hydropower allowed the installation of smelters, as long as water access for the ore was available. The product was then sold to the Americans.  (Meanwhile the Chinese, not to be outdone, set up smelters of huge proportions on their rivers, as did the Russians on the rivers flowing into the Arctic.) 

Along comes Mr. Trump and puts on the 10% tariffs.  Does this displace imports for domestic production?  Not quite.  To accomplish that, additional "pot lines" would have to be set up, for substantial capital expense, and you don't do that in less than a year.  So the tariffs are more of a longer-term threat than any immediate shift as you have with basic steel, where this is lots of idle excess capacity around the world.  What did happen?  Well, the crafty Canadians simply started tacking that 10% onto their invoices to US customers, even though the tariffs at that point were only proposed, and not in place. The US customers thus paid the Canadians an extra $600 million in the first two months, to compensate the Canadians for tariffs that did not exist.  

Now what happens is that those buyers that were buying Canadian or Chinese aluminum have to pay more, and the domestic producers simply increased their list prices by 10% to improve their earnings.  So the tariffs are a good deal for Alcoa, and (in the short run) a much better deal for Alcan.  And that was paid by American buyers of the material.  Did that hurt the buyers - those industrial firms that consume aluminum?  Well, yes, a bit, but remember that the material is not the full value of the product, the aluminum is further formed into shapes and castings that in turn are bolted on into the final product.  So the impact is diffused, and is not going to put any buyer out of business.

I think that Trump's team kept the aluminum tariff down to 10% in recognition of the fact that the US aluminum smelters could not produce more, to displace imports, and thus the whole aluminum tariff was more for show than for substance. Will the tariff stay in place?  Probably.  One of the Trump strategies is to motivate private capital to expand domestic basic industries, and an expanded base for aluminum increases the domestic production elasticity of the US economy.  In the short term, the first two years, it will cost some users some cash, but not enough to cause real pain. Yet it will also push for expansion of domestic capacity, and that will be a permanent displacement, particularly of Chinese metal.  Will the Canadians (eventually) get a waiver?  Nobody knows.  Personally, I think they will.  At some point Trump will do that to smooth things over with Ottawa, but that in turn depends on Premier Justin Trudeau being acutely sensitive to the narcissistic personality of Trump.  His father, the legendary Pierre Elliott Trudeau, would not have made the mistake of public criticism; but Justin is getting there. And the Chinese?  They will get kicked out of the US market, just watch. 

Edited July 27, 2018 by Jan van Eck

[Dan Warnick + 6,100]

21 minutes ago, Jan van Eck said:

I think that Trump's team kept the aluminum tariff down to 10% in recognition of the fact that the US aluminum smelters could not produce more, to displace imports, and thus the whole aluminum tariff was more for show than for substance. Will the tariff stay in place?  Probably.  One of the Trump strategies is to motivate private capital to expand domestic basic industries, and an expanded base for aluminum increases the domestic production elasticity of the US economy.  In the short term, the first two years, it will cost some users some cash, but not enough to cause real pain. Yet it will also push for expansion of domestic capacity, and that will be a permanent displacement, particularly of Chinese metal.  Will the Canadians (eventually) get a waiver?  Nobody knows.  Personally, I think they will.  At some point Trump will do that to smooth things over with Ottawa, but that in turn depends on Premier Justin Trudeau being acutely sensitive to the narcissistic personality of Trump.  His father, the legendary Pierre Elliott Trudeau, would not have made the mistake of public criticism; but Justin is getting there. And the Chinese?  They will get kicked out of the US market, just watch. 

Another win that will not be reported in the U.S. mainstream media?  And since Trump is incapable of presenting wins as anything more than egomaniacal BS, most people won't even pick up on the facts from him.  Sad, really.

[Jan van Eck + 7,558]

30 minutes ago, Dan Warnick said:

Another win that will not be reported in the U.S. mainstream media?  And since Trump is incapable of presenting wins as anything more than egomaniacal BS, most people won't even pick up on the facts from him.  Sad, really.

It will probably end up that way.  ---  Unfortunately Trump presents himself as so unstable that the other question is:  will the aluminum industry see sufficient staying power in the tariffs (and possibly quotas) to justify the risk of spending hundreds of millions on new smelting lines?  Although I think all the craziness is at least partly an act, the instability and turmoil inside the White House does not inspire confidence.  Trump does not fire those FBI guys and those prosecutors, and issue blanket pardons to people like Manafort  (I find him disgusting, an amoral pig, but sometimes you have to  pardon those guys to get on with more important business), so everyone is obsessed with the garbage and no focusing on moving the country forward.  And that is the bigger risk.  You can bet that if Trump is expelled, and say a Clintonite steps in, then you are instantly back to being cozy with the Chinese, to the huge hurt of Americans.  It is the nature of politics as it has evolved in the USA  (and is another reason I am a committed Monarchist). 

Edited July 27, 2018 by Jan van Eck

[dowmike + 37]

It's more like he's making it up as he goes along. Throwing big things out there to see where they fall, and how everyone reacts and then responding to that. Which makes it all impossible to predict.