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Why Alcoa Is Apprehensive about President Trump’s Tariffs

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President Trump’s tariffs

As noted previously, Alcoa (AA) posted record EBITDA (earnings before interest, tax, depreciation, and amortization) in the second quarter. According to Alcoa, “Higher alumina and aluminum prices, as well as a stronger U.S. dollar, were the primary factors driving this sequential increase. Somewhat offsetting these factors were unfavorable mix and higher costs for energy, raw materials, and maintenance activities.”

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Notably, we saw a sharp rise in alumina and aluminum prices towards the beginning of Q2 2018 after President Trump imposed sanctions on RUSAL, the leading Russian aluminum producer. In alumina’s case, partial curtailment of Norsk Hydro’s (NHYDY) Alunorte refinery further led to a spike in prices. US Midwest aluminum premiums also rose to multiyear highs after President Trump imposed Section 232 tariffs.

Alcoa on tariffs

During the second-quarter earnings call, Alcoa’s CEO, Roy Harvey, said, “While tariffs have pushed the Midwest premium higher, providing U.S. aluminum producers with the benefit, there is no long-term certainty to the duration of those tariffs.” Harvey also said, “232 tariffs are also increasing costs for U.S. downstream manufacturers and will have an impact on their global competitiveness on U.S. consumers and eventually, underlying demand for aluminum in the United States. In short, tariffs will not solve the challenges facing the aluminum industry.”

Alcoa also expects a negative impact of $12 million to $14 million each month on its earnings from the Section 232 tariffs, as it now pays tariffs on aluminum shipped from its Canadian smelters to the United States.

In the next and final article, we’ll look at Alcoa’s 2018 guidance.

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