US-based aluminum producers including Alcoa (AA) and Century Aluminum (CENX) are trading with double-digit year-to-date losses despite the Section 232 tariffs President Trump imposed. In this series, we’ll look at Century Aluminum’s risk-reward proposition. Let’s begin by looking at the risks first.
- Aluminum markets have been rattled by higher Chinese aluminum exports. China’s unwrought aluminum exports rose 12.8% in the first five months of the year and hit the second-highest level on record in May. Higher Chinese aluminum exports tend to put pressure on aluminum prices. There are concerns over Chinese aluminum demand, as the surge in construction activity that we saw last year hasn’t continued in 2018.
- Furthermore, escalating trade war fears are negative for risk assets. Commodities, in general, are sensitive to developments in China. If the trade war between the United States and China escalates further, aluminum could come under pressure.
- There is still uncertainty over Section 232 tariffs. President Trump has also imposed tariffs on NAFTA (North American Free Trade Agreement) and European Union aluminum exports, as an agreement on a long-term exemption could not be reached.
- Another risk that Century Aluminum faces is the volatility in alumina prices (XME). The company buys alumina from third parties, so higher alumina prices negatively impact its profitability. Companies like Rio Tinto (RIO) and Norsk Hydro (NHYDY) also have upstream alumina refining operations. Notably, alumina prices surged to an all-time high earlier this year after Trump imposed sanctions on Russian producer RUSAL.
In the next article, we’ll look at different opportunities for Century Aluminum.