STEEL AND ALUMINIUM – COMMODITIES ON THE FRONT LINE OF NEW TRADE WARS?

Steel and aluminium seem to be the commodities in which the new relations between the two largest economies of the world, US and China, are becoming tangible. After declaring his intention to investigate into the steel’s role in national security, prsident Trump ordered his Commerce Secretary to look into the importance of rising aluminum imports. Due to Trade Expansion Act of 1974, the president of US can indeed put restrictions on the trade.

 

CAN US STEEL PRODUCTION BENEFIT FROM THE RISING PRICES?

As Chinese domestic steel consumption peaked two years ago, China unleashed a flood of cheap steel on world markets, driving prices down. The two largest US steel producers responded differently to the new market conditions. US Steel Corporation cut investment in improving their blast furnaces and chose to defend their profit margins. This leads to the question of whether they can really benefit from the recent rising prices and ramp up production. The largest US steel producer Nucor, however, uses less energy intensive production processes with scrap instead of iron ore as the main component, and seems to have more room for capacity extension.

The average price of US hot-rolled steel has risen by 45% since April last year, reaching $704 per metric ton. This is most likely the result of President Trump’s anticipated restrictive measures. EU has already imposed tariffs on Chinese steel and US is considering the same in the order of 45%.

 

ALUMINIUM AS A NEW INVESTING IDEA?

There is only one smelter in the US capable of providing top quality aluminium products for the military and aviation. From 2000 to 2016 US aluminium output dropped while in China it rose dramatically in the same period.

The price of aluminium has been rising during the last few years, due to the rising demand and rumours of China doing something about its excess capacity. Aluminium price is usually more stable due to its dispersed storage which makes it more resilient to market’s reaction following various political upheavals. Despite that, aluminium is the performer of the year on the London Metal Exchange. Are warehouses really not that well-stocked anymore and is the looming trade war between China and the US enough of an incentive to invest in aluminium? How far will China, which produces nearly half of all aluminium in the world, go with closing down smelters if the prices keep rising?

Before getting to bullish about steel and aluminium we should consider the timelines. Steel prices may keep experiencing upward pressure with restrictions in place until the US adds to its production capacity. With aluminium investors shall probably be more cautious and see how serious China is about their environmental policies which find aluminium smelters highly problematic. Also, unlike with steel,  we do not know whether Chinese domestic demand for aluminium has peaked yet. Their own predictions of ever rising demand and consumption are difficult to regard as entirely reliable.

David

This entry has 0 replies

Comments are closed.