Price spikes, demand fears cast shadow over metal markets amid Trump’s 25% tariffs

REACTIONS in the metals markets to US President Donald Trump’s new 25 per cent tariffs on steel and aluminium imports may be muted so far, but it belies the underlying tension. With markets on edge and price spikes almost certain, experts warn that the real concern is potential demand destruction.

“The market has reacted with caution. We’re expecting it to be more impactful on premiums rather than price. The long-term implications are unknown, with potential for demand destruction,” said Marex senior metals market trader Tommy Bain.

He is referring to the fact that while the tariffs may not immediately affect the base price of metals, they could influence premiums – the extra cost above the base price that traders pay for specific types of metals, which can be influenced by factors such as supply disruptions.

“Markets are attempting to digest the implications... pretty much everyone is in the dark, given critical details have yet to be furnished,” said Edward Meir, Marex’s senior analyst and president of its commodity research group, in a note on Tuesday (Feb 11), adding that volatility has been “dramatic” in some markets while rather subdued in others.

US Midwest aluminium premiums showed a muted response on Monday. US Midwest steel index futures closed the first trading day after the tariff announcement up 0.2 per cent at US$855 per ton.

Canadian metal hit

Canada was the top importer to the US, accounting for 79 per cent of its imports over January to November 2024, followed by the United Arab Emirates, Mexico, South Korea, China, Bahrain, Argentina, South Africa, Australia and India.

European premiums are falling as Canadian metal is expected to be redirected to Europe. However, it is uncertain how much will actually be shipped, as it will take several weeks for the material to arrive, and circumstances may change by then.

Moreover, European demand for aluminium is currently weak, which makes it harder to move the Canadian metal that usually goes to the US, amounting to about 700,000 tons annually.

StoneX senior metal analyst Natalie Scott-Gray pointed out that the 25 per cent tariffs on all aluminium imports will heighten supply risks, given that the US relies on imports for 80 per cent of its aluminium needs.

On the back of this, Scott-Gray expects the price difference – or arbitrage – between the New York-based Commodity Exchange and the London Metal Exchange to remain elevated in the short term. She added that while much of the anticipated price movement has already been factored into the market, the spread is still vulnerable to further increases.

If the tariffs are implemented eventually, Scott-Gray forecasts that Indian, Middle Eastern and Australian material will be redirected to the US, while Canadian aluminium will flood Rotterdam to avoid tariffs.

“We see India itself as a standout winner in this scenario, importing US, Mexican and Canadian scrap aluminium, and then exporting primarily to the US,” she added.

On steel, Fitch Group’s CreditSights noted in a report on Tuesday that while the tariffs, motivated to support domestic steel manufacturers, are expected to push prices higher, the real concern is whether demand from rate-sensitive sectors such as construction and automotive will be impacted.

“Steelmakers with operations in Canada and Mexico could benefit from tariffs, as rising steel prices may offset increased costs,” the team highlighted.

Olga Savina, senior commodities analyst at BMI, highlighted greater market volatility due to supply disruptions, despite tariffs supporting global steel average prices.

Marex’s Meir noted: “Just like in aluminium, Canada will play a big role in determining US steel valuations going forward, as the country is the largest exporter to the US, selling roughly 4.5 million tons of steel in 2023.”

He added that China is the seventh-largest exporter, shipping around 700,000 tons in 2023 and accounting for less than 2 per cent of the US’ total steel intake.

Broader markets affected

As Trump is expected to provide more details on the tariffs at an upcoming press conference in the next two days, markets are on edge recalling how lawsuits were filed during his first term challenging similar moves. “Although most of those were not successful, they did manage to delay tariff implementation in some cases,” noted Meir.

BMI’s Savina expects “significant volatility” in aluminium prices over the coming weeks as markets respond to a flurry of developments, including subsequent policy clarifications and potential retaliatory measures from trading partners.

“We maintain the view that Trump-led trade policy shifts have the potential to weigh on aluminium prices, with a substantial increase in tariffs pushing up the US dollar, posing headwinds to metals, given their inverse relationship with the greenback,” Savina said, noting that metal price rally in 2018 shortly after tariff announcements was corrected down in the months that followed.

The uncertainty surrounding the tariffs is affecting broader markets. As at 12.30 pm on Tuesday, Bloomberg’s industrial metals index was down 0.3 per cent at US$148.61.

One of the Singapore Exchange’s (SGX) key commodity derivatives, the 65 per cent iron ore (M65F) future contract for April, fell by 0.5 per cent or US$0.54 to US$105.75 per tonne as at mid-day break on Tuesday, reflecting the market’s response to the ongoing tariff developments and potential supply chain disruptions.

A spokesperson from SGX told The Business Times that market participants are closely monitoring the unfolding developments and potential reactions to the new steel tariffs, expecting the immediate impact to be inflationary pressures on US steel prices.

“With the high correlation of steel and iron ore to industrial growth and infrastructure development, coupled with iron ore being the most commonly shipped dry bulk cargo, physical and financial market participants rely on our iron ore and freight derivatives to manage supply chain risks and shipping rate volatility,” said SGX.

Dr Felix Brill, chief investment officer of VP Bank, noted that thematic demand for the industrial metals will stay in place even when people might have to pay more with the tariffs.

The private bank recently included industrial metals in its strategic asset allocation, at a 2 per cent portfolio exposure.

“The industrial metals case is actually a strategic one (as opposed to a tactical one). So, we think there is an investment theme that might play out for the next three to five years, and not just the next three months,” he added.