Can Trump make US metals and steel great again?

Just over a month after Donald Trump’s inauguration as US president, Red Door Research Ltd md Jim Lennon ponders the USA’s global impact in metals today.

Trump’s election as US president coincided with considerable positive momentum in equity and commodity markets in recent months. This has been due partly to positive expectations surrounding US domestic economic growth.

The main factors driving this include expected US tax cuts, a rise in infrastructure spending and the return of manufacturing activity by US companies from overseas back to the USA.

The USA is the world’s largest economy by a significant margin, accounting for 24% of global GDP (in nominal terms) compared with the 15% share occupied by the world’s second largest economy, China.

Make no mistake, changes in US economic policy still have a global economic impact and that is why the world’s policy-makers are watching the Trump administration closely.

From an economic perspective, it still remains clear that “when the US sneezes, the rest of the world catches a cold”.

Rise of China
However, China’s emergence as a major economic super-power, driven mainly by domestic economic policies, has reduced the absolute effect of changes in US growth on global growth.

The data for the US metals’ industry reveal a very different picture than that of GDP of the USA’s global impact. In 2016, the US share of global steel and metals use was between 6% and 9%, compared with China’s share of 45-50% (see chart).

The US share has always been highest in aluminium (due to a large aerospace industry and greater use of aluminium in the auto industry than elsewhere). It is significantly lower in steel.

As our charts show, the US share in global demand has been on its way down for a long time. From a global perspective, the USA was the dominant consumer up until the mid-1980s and changes in the USA affected global price determination.

Over the past 15-20 years, the USA’s impact on global demand has been negligible and price determination has been mostly driven by China.

The big exception, of course, was the US housing market collapse in the late-2000s, which then triggered the global financial crisis and a collapse in metals demand and prices. The USA still matters in macroeconomics, but it does not so much in metals.

It does need to be noted that the reported metals usage numbers understate the USA and over-state the China effect globally. China exports goods containing metals and steel, while the USA and other developed economies import metal-containing goods.

Estimates from the World Steel Assn and base metals researchers suggest that by including indirect trade (metal content of total imports and exports), “true” consumption in the USA is 15-20% higher than reported, while Chinese “true” consumption is 10-15% lower.

However, even after allowing for this adjustment for the USA, its world share only rises by 1.0-1.5%, not enough to really alter the conclusion that the USA does not really matter for metals.

Changing economic structure
The main reason for the long-run US decline is well-known and is due to the changing structure of an economy as GDP per capita rises with growth moving from an economy dominated by infrastructure and construction to one driven by consumption and services.

This is particularly marked in steel, where US per capita consumption peaked in the early 1970s (at a higher level than China’s recent peak!) and is now less than half that peak.

For base metals, such as copper and aluminium, the declines in per capita consumption started later than in steel, from the late-1990s. This was due to the offsetting effect of new applications in copper and aluminium and also the greater proportional use of metals in consumption-related applications than steel.

Copper demand in the USA took over in the 1990s due to a boom in high-tech investment, but this collapsed in the early-2000s. The 2000s also saw a collapse in US auto production as auto imports rose sharply.

There is no question that US consumption of metals has fallen in part due to the relocation of manufacturing activity to other countries (including to Mexico and China, in many cases to manufacturing units owned by US companies).

Any change in US trade policy (such as renegotiating Nafta or applying import tariffs) that leads to industries relocating back to the USA would, of course, boost US consumption. However, it would also mostly be a zero-sum game as far as total global consumption is concerned.

Where gains in US consumption could add to total usage is a major boost to investment in infrastructure. This would have a strong US demand kicker, especially as the Trump administration is insisting on a “buy US steel” policy for major projects.

This is probably the area where there is some potential for stronger demand growth, particularly in steel. However, early in the Obama administration, a similar plan to significantly boost infrastructure spending fizzled out due to political opposition and major delays due to planning and environmental bottlenecks.

The Trump administration is promising to greatly simplify the approval process to fast-track new investment, but the jury is still out on how successful this will be.

So the answer to the question as to whether Trump can make US metals and steel great again is a definite “no” since the glory days when the USA dominated world consumption are long gone.

Can the seemingly inexorable decline in the US share in global demand be arrested and even turn around? The answer is probably “yes”, but partly at the expense of consumption in the rest of the world.

One thing that is already unusual about the first year of the Trump presidency is that it almost uniquely appears to be a year of rising metals’ demand – a good start.

Almost every previous president has presided over a slowdown in his first year of office, in part as the monetary authorities have had to offset the impact of expansionary policies of the previous administration in the year of the election.

This article was first published in the March 2017 issue of MB Magazine, which carries in-depth feature articles, analysis and reviews of metal and steel markets.

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