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Aluminum Investing

Citing national security, the US issued a series of tariffs on Canada and other trade partners last week, prompting countries around the globe to issue retaliatory tariffs of their own.

Canadian aluminum producers supply 47 percent of the aluminum used by American manufacturers, and now that US President Trump has instituted a 10 percent tariff on aluminum from Canada, many producers don’t know who is going to flip the bill for higher export costs.

Citing national security, the US issued a series of tariffs on Canada and other trade partners last week, prompting countries around the globe to issue retaliatory tariffs of their own.

The situation for Canada however, is a bit more complex due to shared borders, strained NAFTA relations and history of multinational cooperation that stretches back decades.

Aluminum, the versatile metal used in everything from soup cans to airplanes is the perfect example of how co-dependent the US and Canada have become. After years of decline by US smelters Canada has become America’s go to supplier of the affordable, in-demand metal.

In fact, the US’ northern neighbor ships 2.8 million tonnes – or 87 percent of all annual domestic aluminum production – to the US from facilities in Quebec and British Columbia on the west coast.

“There’s no way the US is or can be self-sufficient in aluminum,” John Tumazos, an American steel and aluminum industry analyst told the Financial Post. “That day is gone. The US needs Canadian product there.”

The high cost of operation, coupled with increased energy costs forced all but 5 of the 18 US-based aluminum smelters to close since 2007, making the US highly reliant on Canadian aluminum, something Trump hopes to rectify by re-opening shuttered production plants.

But analysts think the move is risky and won’t guarantee US autonomy. Restarting closed smelters could take years and even if all were restarted at their old capacity the country would still be a short 2 million tonnes from the 5.5 million tonnes of aluminum it currently uses annually.

In the meantime, while the 25 percent steel tariff is expected to impact that industry hard, Canadian aluminum producers are likely to benefit from the tariff as the cost will be absorbed by the importer and consumer, and in this case, both are American.

“This is not going to make the US smelting industry more competitive. Not even artificially competitive,” Jorge Vasquez of Texas-based Harbor Aluminum told CBC News. “The US is going to lose more jobs than it gains. No question about it.”

Immediately following Trump’s announcement the base price of aluminum on the London Metals Exchange, suddenly spiked roughly US$0.30, from US$0.90 cents a pound to US$1.20.

Tariffs are expected to be a hot button topic at the G7 summit that will take place in Quebec later this week. Canadian Foreign Affairs Minister, Chrystia Freeland has already indicated the feds feel insulted by the tariff, sentiments that have been echoed by other trade and business partners.

“Do you really believe that Canada, that your NATO allies, represent a national security threat to you?” Freeland said in an interview with CNN. “That’s why the prime minister said it is frankly insulting.”

Canada has issued its own retaliatory tariffs on US steel aluminum and a list of other products; the Canadian tariffs are set to take effect on Canada Day (July 1st).

The spot price of aluminum was slightly up on Tuesday (June 5) to US$1.05.

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.


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