Tariffs on Metal Imports: Boon or Bane?

As trade war tensions intensify, the application of tariffs is expected to drive up the costs of aluminium and steel and could benefit certain producers more than others.

One Business's Tariff is Another's Profit

Most markets declined midweek due to the 25% tariff on global aluminium and steel imports into the United States, followed by retaliatory measures from the European Union. But US-based steel and aluminium producers rallied. As the US is a net importer, the higher cost of imports is expected to aid domestic producers in improving sales volumes and/or prices, making the US mining and metal manufacturing sectors among the few beneficiaries of the market doldrums.

As the policy takes effect, experts continue to debate the extent of its impact, particularly on the final consumer. Some argue that the higher costs resulting from the import taxes will be passed on to consumers, leading to higher inflation but better profits for producers. Others suggest that the overall impact is minimal (the tariffs represent only 0.04% of the pricing of US goods) and that companies are likely to bear the brunt of the increased costs, at least in the medium term. However, the absorption cost could occur at intermediate levels, which would allow raw materials producers to still benefit from higher prices. For instance, the impact of tariffs on the final cost of a beverage can is estimated to be around 0.4 cents, which is unlikely to prompt companies like Coca-Cola or Budweiser to raise prices for consumers. Car manufacturers with larger amounts of aluminium in the chassis might have a better chance of passing the cost on to consumers.

Among the Potential Winners

While aluminium prices have been upbeat, they have yet to surpass last year's highs and remain far from the peaks seen in early 2022, when the war in Ukraine led to fears of supply restrictions. Higher prices might hurt demand in the end, especially if the US economy underperforms. This explains, to some extent, the cautious rallies seen in Alcoa and Cleveland-Cliffs on the heels of the tariff announcement. However, tariffs would still present an investment opportunity during a strong US economy.

Aluminium is of particular interest, as the US has only four remaining primary smelters due to high energy costs, which have led Alcoa to shift its domestic production to overseas facilities (subject to tariffs). Two of these smelters (Sebree and Mt. Holly) are operated by Century Aluminium, which was keeping the Mt. Holly site at half capacity. Century Aluminium could potentially be one of the stronger beneficiaries of the tariffs. It trades at a P/E ratio of just 5.9x, with analyst consensus giving it a price target of $25 per share, a potential upside of almost 30%.

CENX in Consolidation Pattern

Century price action shows a potential consolidation as part of a potential broadening wedge, suggesting a likely continuation towards $30 once the correction pattern completes. Between current prices and $30, resistance sits at $23 and $25. Conversely, a breach of the $16.50 support might trigger a drop below the lower wedge trendline, exposing the stock to a deeper decline towards $10. Higher support lies at the $13 level.

Source: SpreadEx / Century Aluminium

Key Takeaways

Tariffs on imports of steel and aluminium in the US have sparked concerns around inflationary pressures and economic consequences. It has also created opportunities for domestic producers, with experts divided on the extent of the impact. Some expect higher consumer prices, while others expect minimal effects. However, Century Aluminium appears among the companies well-positioned to benefit due to its domestic production capabilities and favourable market conditions.