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Is the Sell-Off in US Aluminum Producers Justified?

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Updated

Sell-off

We saw a sharp sell-off in the equity markets last week. The key driver has been the risk of a trade war between the United States and China, the world’s largest and second-largest economies, respectively.

President Trump, who has frequently vowed to protect US manufacturing jobs and lashed out against China’s trade policies, took two major steps last week. President Trump exempted several countries from the Section 232 tariffs. The tariffs were imposed on aluminum and steel imports after the Commerce Department found that imports were a threat to US national security. When the tariffs were initially announced earlier this month, only Mexico and Canada were exempt from the stringent duties, 25% on steel and 10% on aluminum.

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Trade war

Now, member countries of the European Union as well as Brazil, South Korea, Australia, and Argentina have been temporarily exempted from the duties. Meanwhile, while President Trump has relaxed the Section 232 tariffs, at least temporarily. He has targeted China, and $60 billion worth of Chinese goods could face tariffs in the United States.

As trade war fears took center stage, broader markets saw a selling spree. Looking at aluminum names, we see that Alcoa (AA) and Century Aluminum (CENX) respectively fell 6.3% and 17.8% on March 22, when President Trump announced the tariffs. Looking at the year-to-date (or YTD) price action, we find that both these stocks have now turned negative for the year. Rio Tinto (RIO) and Norsk Hydro (NHYDY) have respectively lost 9.5% and 25.0% year-to-date, based on March 23 closing prices.

The SPDR S&P Metals and Mining ETF (XME) seeks to build a diversified portfolio of US-based metals and mining companies. It was down 7.3% over the period.

In this series, we’ll explore whether last week’s sell-off in US aluminum producers is justified. Let’s begin by looking at aluminum’s recent price action.

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