Shapiro – February 2025 Market Insights

CONSUMER BUYING PRICES

TARIFF WARS – METAL AND MANUFACTURING

The implications of the trade wars will continue to be VUCA: VOLATILE, UNCERTAIN, COMPLEX AND AMBIGUOUS. With that in mind, I will do my best to summarize the potential impacts they will have on metals and manufacturing, knowing that it will most likely be obsolete and irrelevant by the time you read it.

It is important to understand the implications of free trade versus tariffs. Free trade has been an important part of our economy and job growth, especially with our friends and neighbors.

• Free trade is a win-win agreement. It allows countries to specialize in the production of goods and services they can produce most efficiently and for less. We import clothing, electronics, produce and toys at far lower prices than we can produce them. The U.S. has favorable advantages exporting pharmaceuticals, vehicles, oil, agricultural, and petroleum products.
• Mexico is now the largest exporter to the U.S. Lower-cost car parts are used in producing U.S. cars. They also export 16% of the cars we drive. Other important exports are fruits and vegetables.
• Canada is another strategic supplier of primary aluminum, car parts, wood, and petroleum.
• China is no longer our largest trading partner but is still a major source of electronics, such as you iPhone and most Apple products.

All of this has enabled the U.S. to have lower-priced goods and to export our value-added products. This leads to lower inflation and economic growth. It also achieves more peaceful worldwide relations.

• Higher Prices for Consumers: These new higher tariffs, in most cases, will be passed on to consumers. For example, car parts from Mexico and Canada, oil and lumber from Canada, and produce from Mexico are just a few of the items that will increase consumer prices.
• Retaliation and Trade Wars: Our trading partners will also retaliate by placing tariffs n goods that they export. This will raise our prices, creating inflation—not to mention tension and harmful international relations.
• Supply Chain Disruption: Tariffs will complicate global supply chains, increasing costs and logistical challenges for all businesses that rely on international trade, which also includes nearly everyone in the manufacturing and recycling industries.
• Increased Metal Prices: We are now experiencing higher Midwest premium pricing on aluminum. When the steel tariffs are implemented, steel prices will also rise. These will be addressed in the METALS section below.

During the 2016 presidential campaign, Trump pledged to change NAFTA, the North American Free Trade Agreement, which governed trade between the U.S., Mexico, and Canada. He argued that NAFTA led to significant job losses in the U.S., particularly in manufacturing sectors, claiming that companies moved jobs to Mexico to take advantage of lower labor costs. Interestingly, Bernie Sanders also agreed with that. This mainly affected blue-collar workers. As it turns out, the congressional committee studying manufacturing job losses discussed automation in factories as the main reason for much of the job losses.

Trump signed the new USMCA in 2020. He called it the “fair” trade agreement rather than a free trade agreement. On January 29, 2020, President Trump said, “The USMCA, United States-Mexico-Canada Agreement, is the largest, fairest, most balanced, and modern trade agreement ever achieved.”

Late last month, Trump announced a 25% tariff on Mexico and Canada, at which time they announced 25% tariffs on U.S. goods. On February 3, the day before the tariffs were to take effect, a last-minute deal was reached to postpone the tariffs until March 1. Trump announced on February 9 that 25% tariffs were to be placed on Mexico and Canada for aluminum and steel. A day later, he announced March 4 as the start date for the metal tariffs.

What will tariffs do to the economy? ITR Economics sums it up: “The answer is difficult to encapsulate for the entire economy beyond a probable drag on GDP growth with a more discernible impact on Total Industrial Production growth and additional, though marginal, inflationary pressures.” We shall see.

INFLATION

• The Consumer Price Index (CPI) for January rose 0.5% for the month. The annual rate was 3%.
• Core inflation for January rose 0.4%. The annual rate this year was 3.3%.
• The Supercore CPI measures service prices excluding energy, goods, and housing costs that the Fed has highlighted, and soared 0.8%, the fastest monthly increase in a year. The annual rate was 4.1%. The increase was led by higher prices for, used vehicles (+2.2%), motor vehicle insurance (+2.0%), and hotels (+1.7%) The belief is that higher wages are now causing these increases. This data will likely cause the Fed to slow down the interest rate decreases previously expected this year.
• Personal Consumption Expenditures, PCE, the Fed’s preferred inflation measure for core inflation for December, rose by 0.2% last month, compared with 0.1% in November, and by 2.8% over the past 12 months. December was the third straight month that core PCE inflation stalled at 2.8%. However, core PCE over the last 3 months was running at 2.2% on an annual basis. This is another good inflation sign.
• Market-Based Inflation. I can be a little geeky about inflation, and I just learned about a new inflation gauge the Fed believes is a better inflation indicator than the PCE. Market-based inflation excludes several items that government statisticians have to estimate because they don’t have the benefit of observing actual prices paid by consumers for those services.
• Some of these estimated, excluded inflation items are, gambling, life insurance and car insurance. Another excluded inflation item is the increase in stock prices. Really! I like that form of inflation. Using the market-based inflation measure, inflation is 0.4% lower than the PCE annual rate of 2.8%. Whereas core PCE, the central bank’s preferred underlying inflation gauge, accelerated to 2.8% in November, the market-based measure has been more or less flat at 2.4% since May.

MANUFACTURING

Still choppy

• ITR is forecasting a 5.6% increase in aircraft production for 2025, rising in the second half on a 12-month moving average before falling to a 3.1% growth rate next year.
• US non-defense capital goods new orders, excluding aircraft, rose 0.3%.
• Shipments of core non-defense capital goods excluding aircraft, an essential input for business investment in calculating GDP and a leading manufacturer indicator, rose 0.6% in December following healthy 0.4% increases in October and November. These shipments rose at a 3.0% annualized rate in Q4 versus the Q3 average. This is back to positive after declines in shipments in both the second and third quarters of the year.
• New home sales are in a mild decline as the 30-year mortgage rates have climbed back to the 7% range.
• Car and light truck sales fell to 15.6 million on an annual basis. 2024 sales were 16 million.
• The NFIB (National Federation of Independent Business) reports that the small-business confidence index fell 2.3 to 102.8. The uncertainty index surged 14 points, the most in data going back to 1986. Although they are still optimistic, hiring the right people continues to be a problem.
• The Shapiro Nonferrous Scrap Activity Index tracks our daily purchases from duplicate accounts across our ten locations and a diverse industrial base. Based on our twelve-month trailing average, volumes were down 11%.

CHINA

Tariff wars

China has still not been able to fix its housing bubble. It is the same story—oversupply, very little demand, and falling prices. In addition, they are faced with a demographic collapse, global trade challenges, and a debt crisis. Prices in China dropped 0.7% last year, reflecting deflation.

With all of these issues, consumers have reduced their buying and increased their savings. China keeps trying to export its way out of the problem to no avail.

Official PMI dropped into contraction for the first time in four months, from 50.1 in December to 49.1 in January. The Caixin index dropped to 51 from 52.2.

I have been doubting for some time the so-called official reports of 5% growth in GDP and low unemployment. I just learned that the government has pressured universities, banks, and other institutions in mainland China and Hong Kong to ensure that their economists do not question the accuracy of government statistics.

METALS

Trade wars and 2025 primary aluminum forecasts

Ford CEO Jim Farley: “Let’s be real honest: Long-term, 25 percent tariffs across the Mexican and Canadian border would blow a hole in the U.S. industry that we have never seen.”

On February 10, President Trump signed executive orders increasing U.S. Section 232 Tariffs on aluminum to 25% from 10%, effective March 12, removing all country exemptions and canceling the product exclusion process. During this time period, the tariffed countries will also impose tariffs on their exported goods.

The tariffs and counter-tariffs should lead to negotiations. Trump likes to negotiate by making a bold demand and then getting part of what he wants. He then claims victory and moves on. While this has been his tactic for some time, he might change and not back off. If so, there will be chaos, especially in the auto sector. I am sure Musk will be involved in this and hopefully get Trump to back off. At this point, who knows?

Since Trump was elected, the Midwest premium has already increased from $0.22 to $0.358 (up 6.8 cents on Feb 11). Harbor and Goldman have forecasted that, because of the tariff, the premium could go to $0.50. If so, this tariff will have a net negative effect. Meanwhile, LME aluminum has risen only 2% since the beginning of February. The tariffs are already increasing prices on new aluminum and steel in anticipation of the tariffs. We shall see how long this goes on.

While the threat of trade wars continues and keeps changing, businesses are faced with volatility and uncertainty. This chaos is never good for businesses. It makes planning next to impossible.

The nonferrous scrap prices have all moved up slightly. Prime aluminum scrap is up about 3 cents, secondary aluminum is up 1 to 2 cents, copper is up 8%, stainless steel is up 1 cent, and scrap steel rose $40 per ton.

2025 ALUMINUM FORECAST

I also subscribe to Harbor, which provides detailed analyses of all the issues facing aluminum. They also host the best Harbor Aluminum Summits I have ever attended. Each year, they exceed all expectations.

I have compared Edward Meir’s and Harbor’s 2024 forecast versus the actual. Harbor’s LME forecast was based on the spot LME, while Ed Meir’s was based on the three-month, which tends to be slightly higher than spot—a nominal difference. The actual average aluminum price in 2024 was $2,457. Meir forecasted $2,280 (-7.76%), while Harbor forecasted $2,080 (-15.3%). Meir’s high and low forecasts were 9% lower than the actual, while Harbor’s were about 15.5% lower than the actual. Meir’s forecasts were among the most accurate of all forecasters. I am amazed at his brilliant accuracy.

For 2025, Meir sees the supply/demand profile in surplus by about 300,000 tons. Harbor’s Jorge Vasquez believes there will be no aluminum scarcity for the next three years. The demand side will be mainly influenced by China. Aluminum demand in China fell to 1.7% growth last year from 7.6% growth in 2023. The demand growth in China is forecasted to be about the same as in 2024.

CLOSING

When trading partners are threatened with tariffs, they look for partners they can trust. If this continues to happen, the U.S. will start losing its valued trading partners.

Bruce Shapiro