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Metal markets are preparing for a new world disorder
US President Donald Trump's attempts to rebalance global trade have already sent the metals world into a tizzy. As countries respond to US tariffs and sanctions, the disarray is set to increase.
Steel prices and aluminium premiums are shooting up in the US thanks to tariffs, threatening to wreak havoc on manufacturers. Everywhere else, metal prices are on a roller-coaster ride, with copper and zinc retreating on fears of slowing demand. If equity investors have stayed sanguine so far, metal investors are voting with their feet.
The next steps may be more dramatic as the US and China engage in trade-war brinkmanship that may involve hundreds of billions in tariffs on everything from cars to soyabeans.
For AKE International analyst Maximilian Hess, the stand-off is part of an uptick in geo-economics, a mix of policy and economics, that will squeeze or aid certain metals companies and commodities.
Mr Trump's tariffs have helped make US steel prices among the highest in the world. That swells the bottom line of domestic producers such as Nucor Corp and US Steel Corp as well as benefiting the US plants of foreign companies such as ArcelorMittal. And while Canadian and Mexican producers are subject to tariffs, Brazilian rivals aren't. That has helped push up shares in Sao Paulo-based Gerdau SA by 22 per cent this year.
While sky-high US metal prices are great for local producers, manufacturers have to pick up the bill, undermining their competitiveness. CRU Group's principal steel analyst Josh Spoores put it bluntly: "We're going to see a lot more offshoring."
So successful have tariffs been in pushing up American steel that foreign metal is becoming more appealing. And Phil Gibbs, a steel analyst at KeyBanc Capital Markets, says demand destruction is a real concern, with consumers potentially reconsidering orders.
Tariffs look set to squeeze margins for carmakers, which may encourage them to shift operations and even materials, says CRU aluminium analyst Doug Hilderhoff. One possibility is that carmakers reconsider plans to increase their use of aluminium and stay with steel.
Mr Hilderhoff also says original equipment manufacturers could move to Mexico or Canada, where they can import aluminium without a tariff and turn it into finished goods that can be shipped into the US without being taxed.
Few industrial metals have been left unscathed by tariffs, sanctions and the uncertainty of how long they will last. A month ago, copper was flying near four-year highs as investors looked towards a tightening market.
But as fears grow that tariffs will erode global growth, copper and other metals capitulated. The pullback has come just as producers were starting to move forward on expansion plans after emerging from a painful downturn. As prices retreat, the industry may start to question its newfound largesse and batten down the hatches once again.
Still, analysts including Citigroup Inc's Max Layton say there's scope for the US and China to give each other the kind of concessions that would enable both sides to claim a win, thereby clearing the way for a recovery in metals.
Trade conflicts between the US, its allies and China, and threats of tariffs on US car imports, have thrown a wrench into metals used in rechargeable batteries.
"In the medium or longer term, it may constrain the industry as carmakers are not committing to new production lines," Gavin Montgomery, director of metals markets research at Wood Mackenzie, said in an email. "There is so much uncertainty in terms of where they might source parts and what their export markets might be."
Few epitomise how quickly the sands are shifting more than Glencore Plc. One of the most adept companies at navigating tough environments, the giant trader and producer is now dealing with tariffs in various forms, as well as a long list of supply shocks, including sanctions and resource nationalism.
In April, CEO Ivan Glasenberg had to quit the board of one of Glencore's biggest aluminium suppliers, United Co Rusal, after it was hit with US sanctions. Glencore also has taken steps to get around US sanctions in the Democratic Republic of Congo while fighting a new mining code there. Last week, US authorities demanded documents relating to possible corruption and money laundering.
While China is the main focus of Mr Trump's trade push, other countries are moving to prevent dumping. The European Union said it will impose curbs on foreign steel to prevent being flooded with shipments diverted away from the US. Canada is said to be making similar plans.
The tariffs are also forcing Asian nations to erect barriers. That means fewer markets for surplus steel from China where demand will continue to soften, according to Bloomberg Intelligence metals analyst Andrew Cosgrove. While that suggests tariffs will succeed in addressing Chinese oversupply, it also means prices in other countries will be higher, hurting manufacturers, he said.
The Rusal sanctions, combined with disruptions in Brazil, inflated prices of alumina, the main ingredient in aluminium. That pushes up costs for smelters that buy alumina and provides incentives for those that make their own, such as Alcoa Corp, to sell more on the market and feed less to their own smelters - not what Mr Trump would want to hear as he tries to revive idled US plants. BLOOMBERG