Shares in Century Aluminum (US:CENX) are on a tear. With London Metal Exchange futures for aluminium up 54 per cent since November 2015 and now hovering at six-year highs, the group’s ascent may not seem much of a surprise. Taken together, the Nasdaq-listed group’s smelting facilities in Kentucky, South Carolina and Iceland are at the higher end of the global cost curve. Any increase in the price of aluminium has a much more pronounced effect on Century’s earnings than, say, RUSAL (HK: 0486), one of the world’s lowest-cost producers.
But the speculative bets on Century's shares are mounting for another reason: expectations that Donald Trump will approve tariffs on US imports of aluminium and steel. On 16 February, US Secretary of Commerce Wilbur Ross recommended the president sign an order imposing a blanket tariff of at least 24 per cent on all foreign steel and 7.7 per cent on all aluminium shipped to the US.
As Century's shares jumped 12 per cent, its chief executive Michael Bless welcomed the proposals and called on the US president “to act swiftly and boldly to save the American aluminium industry”. Trade officials and resources companies around the world are nervously following developments ahead of a White House decision before the end of April.
Trump campaigned on a ticket to prop up America’s floundering steel industry, ostensibly to create jobs. Domestic production of both metals under review has been in steady decline amid the rise of cheaper imports, which now account for 34 per cent of steel and 91 per cent of aluminium consumption. Beyond jobs and domestic producers, the Ross reports stated that the declines in domestic steel and aluminium production brought about by cheap imports “threaten to impair the national security”.
The direct and indirect threats to UK-listed resources stocks are hard to determine. One potential impact could be Rio Tinto’s (RIO) Canadian aluminium smelting operations in Quebec and British Columbia, which sell more than $2bn to US customers annually. And while Canada is pushing for exemption from the potential 7.7 per cent tariff, the group could see its quota pegged to 2017 levels.
If enforced, the tariffs are unlikely to have a direct effect on Vedanta Resources (VED), one of the largest aluminium producers listed in London. The group’s smelting operations are based in the Indian state of Odisha, and sell to a predominantly domestic customer base. South32 (S32) does not disclose specific country-level sales figures, but US-bound production – including any of the group’s South African aluminium output – makes up only a small proportion of overall trade.
Glencore (GLEN), which incidentally owns stakes in both Century Aluminum and RUSAL shareholder EN+, could potentially benefit from any short-term volatility in commodities trading. At least that’s what its prized marketing division is set up to benefit from, as full-year results from the group recently showed. In 2017, Glencore sold 10.7m tons of alumina and aluminium into a market disrupted by Chinese supply-side reforms and new environmental policies aimed at clamping down on the dirtiest zinc, coal and aluminium production.
The outlook for steel is of greatest consequence to the Roman Abramovich-backed Evraz (EVR), not only Russia’s second-largest producer of the metal, but an operator of several steel mills in North America. The group did not respond to a request for comment, but chief financial officer Nikolay Ivanov has previously said that a US ban or tariff on steel imports would only affect “some semi-finished products”, and the net effect could be mitigated by re-routing exports to other markets.
