Base Metals Dashboard - Week Ending July 29, 2022

Higher steel demand is expected this year. Pent-up consumer demand for new cars, trucks, and SUVs will lead to higher steel shipments in 2H 2022, according to steel producer Cleveland Cliffs. The company made these statements in its 2Q 2022 earnings report. This renewed demand comes after two years of lackluster automotive production, when North American light vehicle production averaged 13 million units per year, down from 17 million units per year prior to 2020, according to their calculations. Cleveland Cliffs is the largest steel supplier to the automotive market, according to S&P Global.

Regarding nickel supplies, the LME will not ban nickel from Russia’s top producer, Norilsk Nickel. Reuters reported this revelation late week. This disclosure from the LME comes despite the UK government sanctioning Norilsk Nickel’s president, Vladimir Potanin, late last month. Last Friday, the LME stated it continues to evaluate the sanctions that the British government placed on Potanin in June. The exchange has not disclosed how much nickel in its system is from Norilsk Nickel. According to Reuters, Norilsk Nickel is the world’s largest producer of refined nickel. In our view, possible banning of Russian nickel or other metals is an upside price risk, as doing so could lead to global shortages. The most straightforward way to hedge this risk is by entering into nickel swap contracts for a portion of your consumption.

As for aluminum supplies, due to a recent downturn in prices, nearly half of China's aluminum capacity is probably operating at a loss, Alcoa's CEO stated in an earnings call last week. The company, therefore, estimates that between 10% to 20% of global aluminum smelter capacity was unprofitable in June. Falling aluminum prices might have been tolerable if that were the only concern; however, the company expects that rising energy and raw material costs will erode its profit margins, despite increasing global demand. Surging electricity costs in North America and Europe, recession fears, and COVID lockdowns in China are affecting global aluminum demand and supply, according to Bloomberg.

Finally, regarding the Section 232 tariffs, The Beer Institute proclaims the current Section 232 tariffs on aluminum imports have cost the industry over $1.4 billion since 2018 and have brought no economic benefit to American consumers. These statements were asserted at last week’s public hearings on the economic impact of Section 232 import tariffs on the steel and aluminum industries. During the hearings, the US International Trade Commission heard from consumers and producers of those metals, which have been tariffed since 2018 by the Trump administration. The Beer Institute was especially vocal about the tariffs, saying the tariffs “increase production costs, inhibit investment, and impact consumer prices.”

Section 232 tariffs are at the discretion of the US executive branch and are allowed for reasons of national security. Current tariffs are 10% on aluminum imports and 25% on steel imports. These tariffs were meant to reduce the flow of metals imports, thereby preventing foreign exporters from dumping cheap steel and aluminum onto the US market. AEGIS notes the cost of the tariffs has supported Midwest Transaction Price on aluminum. Reducing or eliminating those tariffs would likely reduce costs and perhaps prices in the U.S, as these tariffs are based on aluminum prices, and are built into the Midwest Transaction Price. The ITC will release findings in March 2023.