Bruce’s Metal Market Commentary – July 2018
We know that the economy continues to be strong, as most of the key indicators I report on are good. There are only a few weak spots in manufacturing. What we don’t know is what effect the current Section 232 tariffs and other tariff policies will have in the second half of the year and beyond. The 25% steel tariff and 10% aluminum tariff are causing a lot of price pain in manufacturing, as well as supply chain uncertainty. This is further complicated by NAFTA negotiations with Canada and Mexico, who supply over 50% of our steel. We do $1.1 trillion in trade with those countries and $840 billion in cross-border investments. Thus far no NAFTA resolution is on the horizon.
Uncertainty causes businesses to take action to protect themselves. For example, Harley-Davidson announced it would move some of its production overseas to avoid the EU’s retaliatory 25% tariffs on US-built motorcycles, which will also save the company $100 million. I would think that is a long-term strategy and not a knee-jerk reaction. GM has also said the tariffs would hurt US car manufacturers and could cause domestic job cuts.
As the trade war goes on, our trading partners are also piling on tariffs. Tariffs have a similar effect as sales taxes and will eventually slow our growth. The VP of the Association of Equipment Manufacturers said that tariffs are “terrible news” for this group and that “it will effectively wipe out all the gains that our industry has seen from the tax reform and regulatory relief.” The metal tariffs were added to protect the domestic steel and aluminum industries and are expected to collectively increase jobs in those sectors by over 26,000. However, the resulting increased metal costs have prompted estimates that more than 430,000 manufacturing jobs could be lost. I am not sure if that statistic is entirely correct, but it is not a good sign for manufacturing.
The Wall Street Journal reports: “Mr. Trump is casting the trade battle as a long-term effort to bring back to the US jobs that have been lost because of Chinese imports and what the U.S. considers unfair trade practices, such as pressuring U.S. firms to transfer technology to Chinese firms.” What will happen when the soybean farmers and other industries feel the pain of tariffs and start losing money and jobs? How long will the trade war last? It is the continued uncertainty that will affect business and consumer confidence. I know this is not good for us or the economy. Of course, Trump could change his mind and policies. More uncertainty.
Metal prices have also been affected by the trade war. Prime aluminum prices have dropped, along with copper and nickel prices. Prime aluminum scrap is down more than 5 cents a pound this month. Rusal metal is once again flowing here, but the US government’s issue with the Russian aluminum company has not been resolved. Rusal’s owner, Oleg Deripaska, was the main target for the US sanctions, but he has not sold his ownership in the company as desired. The US government might, therefore, rule against Rusal and decide to keep sanctions, which are set to take effect in October. This has led to some support in aluminum prices, with secondary aluminum prices remaining steady. Copper prices have dropped and are at a low for the year. While nickel prices have dropped, stainless steel prices did not.
Hot rolled coal prices are making new highs again and are over $900 per ton. Iron ore is still flat at about $60 a ton. Scrap steel prices were up in the Chicago market by $10 a ton and flat in the Alabama market. It is a great time to be a U.S. steelmaker.
“One of the tests of leadership is the ability to recognize a problem before it becomes an emergency.” —Arnold Glasow.
Work Safe. Work Smart. Profits will follow.