US president-elect Donald Trump won November’s hotly contested election thanks partly to protectionist trade positions but it’s yet to be seen if his brash but broad rhetoric will evolve into policy.
The world will be watching when Trump is sworn in as the 45th president of the US at midday on January 20, 2017, and wondering how his administration will affect trade, markets and commodities – including metals.
“There’s a big difference between what’s said during the campaign and actual governance. [Trump] does have the advantage of [the Republicans]) holding both houses of Congress but the global economy is a complex machine that can’t be fixed with 140 characters,” one US base metal trader said.
“Metal prices are up and [equity] prices are moving higher so industry seems to be onboard for now. But there are still so many landmines that the new administration could trip over in 2017. [Trump] wants to pressure China and Mexico but at the end of the day no one wins in a trade war,” he added.
The incoming administration believes it can attract manufacturing jobs back to the US by scrapping multinational free-trade deals, including the Trans-Pacific Partnership (TPP) as well as the North American Free Trade Agreement (Nafta).
Trump has called the TPP agreement “a potential disaster for our country” and has pledged to withdraw from the proposed trade deal on his first day in office.
“Instead, we will negotiate bi-lateral trade deals that bring jobs and industry back onto American shores,” he said in a November 21 video.
And while Nafta might have its flaws, many worry that there are also significant risks to renegotiation, especially for the border states and Mexico, Joe Burke, director of recycling at Progress Rail Services, said.
“Very few things done by our government are done right the first time. I think the fear of opening it, [considering] the value-add of what Mexico is bringing to the US, Mexico is going to be that much more protective," Burke said.
Meanwhile, Fitch Ratings has downgraded Mexico’s outlook to negative from stable because Trump’s victory has “increased economic uncertainty and asset price volatility in Mexico as the President-elect has alluded to renegotiating Nafta with Mexico and tightening immigration controls”, it said.
The volatility of the peso, a continued fall in oil production and the tightening of economic policy also will hinder the performance of Mexico’s manufacturing exports, according to the agency.
Collision course with China
Further afield, Trump has also become embroiled in a war of words with China.
Beijing sees Trump’s call at the start of this month to congratulate Tsai Ing-Wen on becoming “president” of Taiwan as a violation of China’s national sovereignty and a break of diplomatic protocol in dealings with the China-Taiwan issue.
This is believed to be the first time in four decades that a US president or president-elect had spoken to a Taiwan leader.
Trump’s inflammatory comments on the “One China” policy triggered a strong backlash from the Chinese government, which considers Taiwan a province of China.
“I don’t know why we have to be bound by a ‘One China’ policy unless we make a deal with China having to do with other things, including trade,” Trump told the Fox News channel.
He has also threatened aggressive action including possible tariffs and retaliation for perceived currency manipulation.
“Did China ask us if it was OK to devalue their currency (making it hard for our companies to compete), heavily tax our products going into their country (the U.S. doesn’t tax them) or to build a massive military complex in the middle of the South China Sea? I don’t think so!” Trump said via Twitter on December 4.
There are plenty of US manufacturers who would like China to be taken to task. A new trade deal with China needs to be negotiated to “end [China’s] trade war on the United States”, Alliance for American Manufacturers president Scott Paul, said.
The USA would benefit from fewer imports from China and the end of Chinese currency manipulation, he added.
There have already been a slew of anti-dumping cases against China by the western world in steel and aluminium.
In aluminium, for example, the US Commerce Department ruled that China Zhongwang Holdings Ltd circumvented US duties on exports of heat-treated aluminium extrusions that meet the chemical specifications for 5050-grade alloy. The Chinese company has denied acting improperly.
In steel, meanwhile, US anti-dumping rules now cover 19 categories of Chinese steel. Duties on Chinese cold-rolled steel imports at 266% have halted Chinese steel exports to the US, a BMI research analyst said.
“Over the past few years, both the US and the EU have implemented import tariffs on Chinese steel under the guise of anti-dumping measures,” BMI said. “Given [Trump’s] strong anti-China and pro-industry rhetoric… and rising populism in Western countries in general, we expect to see ongoing protectionist measures in these markets.”
There could be changes to takeover rules that make it more difficult for Chinese companies to buy US companies. Trump has also talked about imposing a 45% import duty on all goods from China if they are unable to agree to better trade terms.
“That would be bad for China. But whether that will happen in the end is still uncertain,” a Shanghai-based trader said.
The magnitude of China-US trade – the USA’s trade deficit with China was $365.7 billion last year, up from $343 billion in 2014 – means a blanket tax on all imports is impossible and a trade war would be damaging to both parties, he added.
Chinese steel export volumes to the USA fell to 977,127 tonnes in January-October from 2.14 million tonnes a year previously, for example. The USA now accounts for a little more than 1% of the 92.74 million tonnes of steel exports by China in the first ten months of this year.
But that naturally limits the effectiveness of any attempt by Trump to drive exports down further.
“Even if Trump later implements tougher trade protection measures, the impact on China’s steel industry would be very low with the current low export rate,” a steel analyst said.
The Chinese government’s determination to remove excess capacity in steel, stainless steel and aluminium could play a more significant role in determining prices next year and beyond, sources said.
And Chinese officials are unlikely to roll over and passively accept sanctions or public rebukes, others warned.
“Keep in mind that [President Barack] Obama was very negative on China coming into office,” Gordon Johnson, managing director at Axiom Capital Inc, said.
Obama quickly implemented an “across-the-board” tariff on tyre imports from China in 2009 but China in turn put tariffs on US poultry and on certain car parts.
“This quickly caused Obama to completely reverse his tariffs and pull it back and never hit China with tariffs again,” Johnson said.
“China has said very clearly that if Trump is aggressive, they are going to be aggressive on putting tariffs on imports of Apple products and cars into China,” he continued. “That will directly and quickly affect US jobs. So I don’t think this is as easy as Trump expects and as the [stock] market is pricing in.”
Infrastructure spending boost
The USA cannot meet from domestic production the expected increase in demand from Trump’s pledge to invest heavily in the country's crumbling infrastructure – it will need to import steel and aluminium, for example, in greater volumes, which will provide a boost to both markets.
“In the long term, Trump’s plan for infrastructure spending will be a boon for aluminium and could be a new engine of growth for the global economy,” a Shanghai-based aluminium analyst said.
“The USA produces limited primary aluminium and they will need to import this for construction. Even if the USA does not buy Chinese aluminium, they could still buy it elsewhere and help decrease global aluminium stocks. This would be good for aluminium prices,” he added.
Trump has said he will spend $1 trillion over ten years on US infrastructure. But this is a drop in the ocean compared with China, which spent $1.4 trillion on roads, railways, bridges, telecoms and other infrastructure in the first ten months of 2016 alone. So China remains the key driver for global metals demand.
And for all his political games, there are many who believe Trump “is a businessman” at heart and that much of his propositions will remain “negotiable”.
“He can’t single-handedly change the world order or else there will be all-out chaos,” a senior commodities analyst warned.
Seats at the table
The US metals industry is expected to claim several important roles in the new administration. Former Nucor Corp ceo Dan DiMicco was in Trump Tower in New York on December 15. As a senior trade adviser to Trump, he is leading the administration’s transition team for the Office of the US Trade Representative (USTR).
The “landing team” for the USTR now includes veteran trade attorneys Jeffrey Gerrish and Stephen Vaughn, both of whom have extensive experience in steel anti-dumping and countervailing duty proceedings.
Meanwhile, steel industry veteran Wilbur Ross was nominated to Commerce secretary. Ross, who founded private equity firm WL Ross & Co LLC, has been involved in the restructuring of more than $200 billion of defaulted companies' assets around the world.
On the steel front, Ross formed International Steel Group Inc (ISG) in 2002 by consolidating former steel behemoths LTV Steel Corp and Bethlehem Steel Corp as well as Weirton Steel Corp, Acme Steel Inc, and Georgetown Steel Corp in addition to the plate operations of US Steel Corp.
ISG was purchased in 2004 for more than $4 billion by what is now the world's largest steelmaker, ArcelorMittal SA.
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Vivian Teo, Rena Gu, Kiki Kang, Ellie Wang, Anna Xu, Susan Zou and Jessica Zong in Asia contributed to this article.
US president-elect Donald Trump won November’s election thanks partly to protectionist trade positions but it’s yet to be seen if his brash but broad rhetoric will evolve into policy.