Trump Tariffs Hit Largest US Aluminum Company, ALCOA

In the history of antitrust law, one of the most important rulings by the US Supreme Court came in 1945, when the Aluminum Company of America (ALCOA), long based in Pittsburgh with heavy Mellon family ownership, was ordered broken up for being a monopoly, following a ruling by Judge Learned Hand.  This was the famous "per se" ruling that said that simple domination of an industry by size was sufficient in the end to justify breaking it up.  However, with the entry of Reynolds and Kaiser into the industry, ALCOA was in the end able to fend off being actually broken up, and today it is still the largest aluminum company in the US and sixth in the world, with Century Aluminum second in the US and Kaiser third. While still with most activity in the US, ALCOA is a multinational company operating in many nations around the world.  Until 2016 it operated in all sectors of the industry, but then spun off some of its specialized processing for auto and aerospace inputs into the Arconic company.

Today stock of ALCOA fell over 4 percent on a report from the company of it expecting to see a , substantial decline in profits in the coming quarters due to the imposition of tariffs on aluminum by President Donald Trump.  So, his imposition of tariffs on aluminum, designed to aid US aluminum producers, will be causing a substantial decline in profits for the largest aluminum producing company in the US.  What is going on here?

It appears that the problem is that the US is increasingly a net importer of unprocessed aluminum that is the main input for companies that process aluminum, which is what ALCOA mostly does, even after spinning off Arconic.  The US has never been a major producer of bauxite, the original source of most aluminum, only producing about 1 percent of global supplies of it.  In term of producing unprocessed aluminum, the US reached a peak in 1980s, with this now only about a quarter of that level today. The US imports $23.4 billion of aluminum products, with nearly half of that, 46.8 percent to be precise, being unprocessed aluminum.  So ALCOA is importing a lot of the unprocessed aluminum it uses to produce aluminum products.  Unlike American steel companies, whose main inputs of iron ore and coal are domestically produced, ALCOA is more like an automobile company that is hurt by the tariffs on steel, which raise its costs.  Thus it is not surprising that the US aluminum industry more broadly has opposed the Trump tariffs, in contrast to American steel and coal companies supporting the steel tariffs.  I note that the US exports some finished aluminum products, but far less than it imports.

The top five nations from whom the US imports aluminum are Canada (36.3 percent), China (15.1 percent), Russia (7.0 percent),UAE (6.5 percent) and Mexico (4.3 percent).  When the tariffs were first announced, meanie Canada and Mexico were exempted due to ongoing NAFTA negotiations, but on May 31, they were included given the apparent breakdown of the NAFTA negotiations.  Back in 2006, ALCOA tried to take over Canada's Alcan, originally a started by ALCOA, but was blocked as Brazil's Rio Tinto took it over instead.  So ALCOA imports a lot from Canada, meaning tariffs on meanie Canada are hitting ALCOA especially hard.  As for meanie China, well, the yuan/rmb has hit a new low for the year against the rising US dollar, which will mean it will still be exporting to the US even as its economic growth rate declines somewhat to about 6.5 percent.  But obviously we have nothing to fear as our "Art of the Deal" president assures us that "trade wars are easy to win."  The meanies will be put in their place, and ALCOA will  just have to have a stiff upper lip and be patriotic along with all our soybean farmers.

Barkley Rosser