US Trade Tariffs & Their Impact on the Base Metal Market – Quick Take 3rd February
05.01GMT on 4th February is the deadline for US tariffs on Canada, Mexico and China to go into play; however, President Trump announced at 15:41GMT that tariffs on Mexico will be delayed by one month. President Trump is also set to talk to Canadian Prime Minister at 20:00 GMT today, while less is known about any upcoming phone conversations with China. Therefore; as it stands, market expectations for lower or no tariffs on Canada and Mexico are building, removing with it supply-side concerns for key base metals like copper and aluminum. Please see below our outlook for the impact to base metals from tariffs (from 30th January) and intra-day key charts.
Key Intra-Day Charts
Intra-Day Price Performance LME 3M Base Metals (1M)
Source: Bloomberg
CME-LME Aluminum Spread 1M
Source: Bloomberg
CME-LME Copper Spread 1M
Source: Bloomberg
Copper : Gold Ratio Intra-Day
Source: Bloomberg
US Dollar Versus LME 3M Copper Correlation
Source: Bloomberg
Impact to the Base Metal Market – Base Case
Taking in these latest developments, we expect targeted tariffs on Canada and Mexico as growing more unlikely, while we see the risk of tariffs coming at or near 10% on China as still possible. In addition, the timeline for ‘universal’ tariffs will be a longer drawn-out process with Treasury Secretary Scott Bessant comments for these tariffs to start at 2.5% (and then gradually rise by the same amount each month), set to tie in with Trump’s stance on creating new trade deals.
In this scenario, base metal prices are open to volatility depending on whether Canada and Mexico can avoid tariffs going into play. With this in mind, we expect the aluminium and copper COMEX-LME arbs to begin to unwind from their elevated levels.
Meanwhile, the other key factor on prices will be tariffs on China. In the scenario above, with Canadian and Mexican tariffs avoided but Chinese tariffs remaining, we forecast that market participants will then focus on demand concerns with a potential reduction in global trade and/or shock to global economic growth creating uncertainty in investment and consumption.
In addition to Chinese tariffs, the wider outlook for ‘universal tariffs’ is growing more unfavorable for the US economy, especially if we base it on verbatim reports of Federal Reserve deliberations back in 2019. (Note, the verbatim accounts of closed-door meetings are released with a five-year lag).
““In 2019, the first full year after Trump began imposing the levies — which were much more carefully targeted versus the broad ones he’s threatening now — the US lost 43,000 factory jobs, industrial production contracted, business investment stalled and real median household incomes fell for the first time in five years. By one estimate, the hit to consumer earnings was $8 billion” - Bloomberg
From the FOMC Meetings 2019:
March: “Your last slide looks for tariff effects on prices and activity. There is growing evidence, from both tariff data and the careful study of import prices paid at the dock, that foreign producers are not cutting their prices to offset the effects of the tariffs— rather, U.S. importers are paying the bulk of the tariffs and boosting consumer prices in some cases, including for household appliances…”,
October: “Several retailers headquartered in the District are concerned about their profitability in light of the tariffs on apparel and footwear that took effect on September 1. Most plan to absorb this cost increase in the near term, but one retailer was selectively increasing prices of some goods in response to new tariffs. “On the very negative side are manufacturing and investment, which continue to be held back by slowing foreign demand, higher tariffs, and trade uncertainty, and the fallout from these headwinds continues to spread, at least in the 12th District. Several contacts reported on a recent sharp slowdown in overseas sales and leasing of heavy equipment—cranes, to be exact—which is now spilling over into various supporting industries not just related to the cranes themselves, but all of the people who manufacture the parts for those cranes. Weak growth and pessimism resulting from trade tensions are also starting to materially affect or alter business planning. My contacts in business services noted that their clients with a global presence have started to cancel discretionary investment spending. They had just been delaying and delaying, hoping for an end to the trade disputes. For them, the Rubicon on trade has now been crossed”.
BBG Chart on Impact of Tariffs on US GDP
Source: Bloomberg
As far as the tariffs imposed in 2018 on aluminum, steel and other Chinese goods are concerned, the net effect was higher prices and job losses and causing a calculated fall of $8.2Bn in real income and a cost of $14Bn on domestic consumers and importers in payments to the government.
LME 3M Base Metal Price Performance Versus Key Macro Drivers
Source: Bloomberg
The outlook is growing more precarious for base metals, with concerns over global demand likely to become a focus point. The suite has been unable to successful hold over its two-year sideways trading channel, with little in the way of positive price drives coming from the macro-outlook in the near-term.
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