By Joe Hoppe

U.S. President Trump will impose a blanket 25% tariff on all aluminum and steel products from Tuesday, a move which has sent metals prices soaring on U.S. commodities exchange Comex. Meanwhile, prices on the London Metals Exchange have remained roughly flat. Kwasi Ampofo, head of metals and mining at energy-transition research agency BloombergNEF, discussed the effect tariffs will have on supply, demand and industry. The following has been edited for length and clarity.

Q: How do you see the tariffs affecting metals prices?

A: Central banks are trying to reign in inflation, and these tariffs will do the opposite, raising inflation and likely interest rates with them. This will initially drive up the price of materials. That won't be good for global industrial metals demand, especially at a time where the market was hoping that we were edging closer to a recovery. Couple that with general market uncertainty around tariff policies, and you get an initial spike.

However, in the long-term, the slowdown in consumption will drive down demand and lead to a decrease in prices on both the LME and Comex exchanges.

Q: Do you expect tariffs to actually hit supply, or just end-demand?

A: Tariffs aren't a quick fix, they are a tool for long-term "behavioral change," and the idea they would impact near-term supply is impractical.

It is very rare for any mine to make a decision based on quarter-to-quarter trends, given the scale of operations. Miners don't have the luxury like the oil industry, for example, where you can decide to extract as much as you want day-by-day based on market trends.

However, tariffs will immediately affect demand. Once a government puts tariffs on products, companies are likely to pass on the added cost to consumers instead of squeezing their margins, which reduces shareholder value. Passing on the cost to consumers will of course drive down demand. Longer-term, I expect supply to be reduced to meet the demand reduction.

Q: Do you see the tariffs being sustainable in the long-term?

A: I think it depends on what sustainable means. Existing U.S. tariffs on steel, Section 232, were implemented in President Trump's first term. There were hopes [former President Joe] Biden would repeal them--they were eased through exemptions and tariff reductions but some levies remained. So to a degree, tariffs are sustainable. It really depends on how many more additional costs the American people can absorb.

Trump 1.0's tariffs applied to crude steel. It was fairly easy to skirt them, because you are looking at a midstream product. This time, they want to apply tariffs to both primary and finished products.

Hypothetically, if you are a manufacturer, you get all your materials from your existing suppliers. You are locked into that offtake for the next two, three years. If there is a sudden change in price, it isn't easy to pivot from one supplier to the other. A car manufacturer's steel requirements, for example--auto companies have about 2,000+ suppliers for different parts on average, and it isn't like you can walk from one supermarket to another when steel prices go up. The qualification process takes time, so they would have to handle those costs one way or the other. Depending on how much these companies are willing to accommodate this inconvenience, these tariffs could extend forever.

Q: Do you expect domestic producers of steel or aluminum to be able to scale up supply in order to satisfy the majority of U.S. demand?

A: Some U.S. steel mills and U.S.-acquired mills are more than a century old at the moment. Currently the utilization rates for steel mills in the U.S. average about 75%. If the U.S. wants to rely on only domestic steel within the next two years' time, that utilization needs to go above 90%. That level of utilization in these old steel mills is practically impossible. So there will still be a market for imports, but someone has to bear that cost.

Biden's Russian tariffs on aluminum did spook the market and pushed domestic investors to look at longer-term solutions to over-reliance. So there have been a few major investments into domestic aluminum production that could potentially help the market in the long term. Since 2022, there has been a wave of plans to build aluminum plants in the U.S. The largest include proposals by Steel Dynamic and Novelis, each with $2.5 billion in investment. The U.S. also awarded Century Aluminum a $500 million grant to construct a new low-carbon primary aluminum smelter in 2024. As the U.S. industry is building new capacities and expanding old ones, higher tariffs could provide a more solid footing and generate new investment.

Steel hasn't enjoyed that same investment--mostly just [mergers and acquisitions] in one form or the other. So for aluminum, there is capacity from both recycling and primary to potentially meet domestic demand, but steel is going to be harder.

Q: What domestic industries do you think will be most affected?

A: The auto and construction industries will be the most affected. If you take a company like Toyota, steel and aluminum represent about 7% of the total cost of raw material. The auto industry is such a low-margin business that I don't think they will be willing to absorb the added costs and instead pass it on to their consumers. On a $30,000 dollar car, I'd expect the costs to increase some $300-$400. So it is quite significant for a household.

Construction is less certain, but we will likely see medium-term price rises, and this isn't going to be as fast as the auto industry.

Q: Do you expect to see significant trade flow redirections?

A: We saw a similar thing happen globally when the war in Ukraine started, rerouting Russian oil, and then aluminum. Countries that would have previously bought from Russia stopped. At the same time, we recorded a spike in Chinese imports of these commodities. This time it is different, the U.S. is potentially enforcing a blanket tariff on every country with no exception. It is still early days, but a blanket tariff's effect on global trade flows could look very different from what we saw with prior targeted tariffs.

Write to Joe Hoppe at joseph.hoppe@wsj.com

(END) Dow Jones Newswires

March 03, 2025 11:50 ET (16:50 GMT)

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