Did Alcoa and CENX Overreact to Section 232 Exemptions?



Alcoa’s sell-off

As we noted previously in this series, both Alcoa (AA) and Century Aluminum (CENX) have now turned negative for the year. The same holds true for Rio Tinto (RIO) and Norsk Hydro (NHYDY). Alcoa’s earnings, like other aluminum producers’, is sensitive to aluminum prices. In this article, we’ll see how aluminum prices have fared this year.

LME (London Metals Exchange) aluminum hit a 2018 closing high on February 19. The Department of Commerce’s Section 232 findings were released on February 16. Between February 19 and March 23, LME aluminum has fallen ~$150 per metric ton. However, aluminum was down only about 1.0% in the last week. So, could last week’s sell-off in US aluminum names be overblown? Let’s discuss this question in perspective.

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Trade war fears

The sell-off in US steel and aluminum names was led by two factors. Firstly, by exempting more countries from the Section 232 tariffs, President Trump has watered down their impact. Secondly, negative sentiments in broader markets led by fear of a trade war also contributed to the sell-off in steel and aluminum stocks like U.S. Steel Corporation (X).

However, aluminum is a somewhat different story than steel. China, which is now at the forefront as President Trump tries to address the burgeoning trade deficit, isn’t a major steel exporter to the United States. But China was the fourth-largest aluminum exporter to the United States in 2016. Russia was ranked second, and together, both these countries sent 1.3 million tons of aluminum to the United States in 2016. Neither China nor Russia has been exempted from the Section 232 tariffs, and they’re unlikely to be exempt. The Section 232 tariffs were imposed on national security grounds, and China and Russia are probably the only two major aluminum exporters to the United States that could pose a security threat.

In the next part of this series, we’ll see how the toned-down Section 232 tariffs could impact US aluminum markets.


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