Trump Tariffs: Why Alcoa’s Fears Are Coming True

Last year, President Trump slapped a 10% tariff on US aluminum imports. Alcoa didn’t support the tariffs in the first place. Alcoa stock has fallen sharply this year and is near its all-time lows.

Last year, President Trump imposed a 10% tariff on US aluminum imports. Alcoa (AA), the leading US-based aluminum producer, didn’t favor blanket tariffs on US aluminum imports. Alcoa stock fell sharply last year. The stock has continued to slide in 2019. Notably, the stock is sitting near its all-time lows, which it hit in August. Starting in September, more Chinese goods have been slapped with US tariffs. US tariffs had a negative impact on China’s economy.

US aluminum production has bounced back over the last year. In the first seven months of 2019, US aluminum production rose more than 40% compared to the same period in 2018. The production increased due to smelter restarts by Alcoa and Century Aluminum (CENX). However, Alcoa’s smelter restart was announced before President Trump’s tariffs. Despite the tariffs, US aluminum production is way short of domestic demand. Basically, US aluminum’s smelting capacity is short of the domestic demand. The country would need new smelting capacity to bridge the gap. Despite Section 232 tariffs, none of the companies are interested in building new smelters.

When President Trump announced the tariffs last year, Alcoa requested that the administration address China’s overcapacity. China’s aluminum production has continued to swell despite the tariffs. To make things worse, China’s aluminum exports hit a record high last year. Looking at the data so far, China’s aluminum exports might hit a new record this year.

Meanwhile, President Trump’s tariffs have triggered a sell-off in aluminum prices. Alcoa has also followed aluminum lower. China’s slowdown, falling global car sales, and the trade war escalation don’t bode well for aluminum. China’s aluminum exports would continue to flood global aluminum markets due to the domestic slowdown.

While US tariffs have helped lift US aluminum production, the US is far from being self-reliant in its aluminum needs. The core issue of Chinese aluminum overcapacity is still on the table. Aluminum prices have fallen amid the trade war, which is hurting US aluminum producers.