Tariffs could affect global growth and aluminum demand

Departments - Nonferrous

If global GDP growth slows as a result of tariffs, aluminum demand could suffer.

May 7, 2018

Recent trade-related moves, including the introduction of Section 232 tariffs on finished aluminum imports into the United States from countries excluding Canada, Mexico, Australia, Argentina, South Korea, Brazil and member countries of the European Union and China’s tariff on aluminum scrap imports from the U.S., have led to hesitation in the aluminum sector.

“I’ve never seen the kind of volatility and uncertainty and risk as what’s going on right now,” said economist Jason Schenker, who spoke during the Spotlight on Aluminum at the Institute of Scrap Recycling Industries (ISRI) annual convention and exhibition, ISRI2018, in mid-April.

*Average monthly settlement price, cash buyer; U.S. dollars per metric ton. Source: London Metal Exchange, www.lme.com.

Schenker is president of Prestige Economics, Austin, Texas. He was joined in the Spotlight on Aluminum by fellow speaker Liu Wei, deputy secretary general of the China Nonferrous Metals Industry Association Recycling Metals Branch (CMRA), and moderator Matt Kripke of Kripke Enterprises Inc., Toledo, Ohio.

When the International Monetary Fund (IMF) released its forecast in January, it predicted a 3.9 percent growth rate for global gross domestic product (GDP) in 2018 and 2019, Schenker said. Such growth should be good news for aluminum.

“Aluminum, like most industrial commodities, is bought and not sold,” he continued. “The demand side is critical to the market, which is why when China went into a manufacturing recession and spent 18 of 19 months between December of 2014 and June of 2016 in a recession, aluminum took a big hit,” as did other globally traded commodities, Schenker said, adding “because the global economy is what will drive prices at the end of the day.”

The global growth rate tends to be strong when trade is strong, he said, which means it could slow if tariff retaliations further escalate. “The trick with tariffs is that they are a lot like cockroaches: There is never really just one.”

“Aluminum, like most industrial commodities, is bought and not sold.” – Jason Schenker of Prestige Economics

Schenker also mentioned that the sanctions the U.S. imposed on Russian aluminum producer Rusal were creating supply disruptions at a time when the aluminum market is extremely short.

These sanctions have put into question stockpiled metal in London Metal Exchange (LME) warehouses that was produced by that company. According to an article from Bloomberg, Rusal’s aluminum accounts for more than one-third of the aluminum in warehouses monitored by the LME, creating uncertainty for the banks and trading companies that own it.

Buying metal produced and sold by Rusal before the sanctions were announced April 6 is not restricted, but the products have become less desirable in the U.S. and Europe, Bloomberg reports. The LME has banned metal produced by Rusal after April 6 from being delivered to settle futures contracts.

The LME received its second largest aluminum delivery in four years April 12, the news service says, noting that the bulk came from Rotterdam and Vlissingen, “two locations where traders historically held large volumes of Russian metal.”

Traders could deliver Rusal aluminum to the LME until April 17, after which they must show it was produced before April 6, Bloomberg reports.