President-Elect Trump’s victory in the November election quickly shifted the focus of the market to potential trade actions. Protectionist policies and onshoring production have been themes throughout his campaigns, and his stance amplifies uncertainty as more severe tariffs and duties are now a possibility.
Just weeks after the election, Trump made the following statement, “On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% tariff on all products coming into the United States, and its ridiculous Open Borders.”
Trump has made similar statements in the past. In 2019, President Trump announced a tariff on all goods coming from Mexico via Twitter (now X), which never came to fruition. This type of blanketed tariff on USMCA trading partners remains unlikely, but the risks are tangible.
Tariffs on Canada would constrain metal supply and increase premiums
In 2024, over 70% of the US’ primary and secondary aluminium imports will come from Canada. As such, the potential impact of any trade action that is applied to Canadian metal cannot be understated.
The Midwest Premium would move higher immediately, though the actual passthrough from tariff into regional premium is unclear. At face value, the tariff threatens to add another 25% of LME on top of the current 10% already in place under Section 232. With Canada exempt from the 232 duties, only the extra 15% would be added if those exemptions are not altered. Taking this a step further, the targeted nature of the tariff would limit the full impact from passing through, making an 8%–13% of LME increase in the premium the most likely scenario. In fact, the initial post alone moved the Midwest premium 2¢ higher overnight.
Trade flows could also shift in response as metal imported from other major exporting regions, namely India and the UAE, could gain share in the US, with Canada’s metal finding other homes. This is supported by netback calculations in CRU’s Casthouse Shapes Market Outlook where theoretical netbacks for Canadian metal exported to Europe are on par with metal exported to the US for slab and ingot form.
Two new rolling mills and other remelt slab and billet facilities are slated to ramp up over the next six to 18 months, which will tighten the scrap market as well. As a result, some rolling mills have already discussed using more primary as their feedstock. Thus, the risk for higher pricing on both sources of metal supply would create a difficult operating environment.
Tariffs would create demand headwinds and increase macro uncertainty
The potential effects of these tariffs on demand are more difficult to pin down. The biggest risk to demand would be on the macro level, as widespread tariffs would increase the prices of goods using imports from Canada and Mexico. Imports from Canada and Mexico play a major role in US manufacturing supply chains – especially in the automotive sector. Price increases, especially for energy, of which Canada is a major exporter to the US, would squeeze consumer real income, reducing demand.
Cost pressures on consumer goods could also lead to a slower pace of interest rate cuts from the Fed. The automotive industry and the housing market’s reliance on consumer borrowing rates put demand in these sectors most at risk. CRU’s Steel team also published an Insight discussing the inflationary pressures the tariffs would create.
The potential for higher metal pricing mentioned above would be passed through the entire supply chain and creates concerns surrounding potential substitution. This is unlikely as the inflationary effects of widespread tariffs would impact many different industries and commodities. In areas such as automotive, it would be an expensive and difficult transition. One end use that is more exposed than others is can sheet, as beverage brands constantly manage their substrate mix.
One end goal of protectionist policies is to onshore supply chains and boost domestic production of finished goods. Any shift here would have a knock-on effect for regional metal balances and could be one bullish factor for metal demand in the US. The complexity of moving entire supply chains and other regions producing at lower costs even with a tariff would offset some of these gains.
In the unlikely scenario of a full-on trade conflict between the USMCA countries, export opportunities out of the US would be at risk. The aluminium rolled product market best illustrates this. By 2028, net exports into the US and Canada will be cut in half, totalling just over 300 kt. This includes 354 kt of exports,150–200 kt of which are consumed in Mexico. The calculation also includes almost 300 kt of consumption in Canada. While this is a thought experiment for now, further disruption of trade flows during a time when new capacity is already forecast to upend current market balances would increase risk.
Other important questions remain unanswered
This discussion could be drastically different by the time President-Elect Trump officially takes office in late January. The leaders of both countries have already reached out to discuss the announcement and are working to avoid any disruptions to free trade between the USMCA partners.
Other details that still need clarity include how Canada’s Section 232 exemption status would be affected, whether there be an exclusion process, and, if implemented, the length of time the tariffs would be in effect. Given the potential for widespread disruptions across a variety of supply chains, our base case considers a blanketed tariff on all imports from Mexico and Canada unlikely.
