Metals & Mining_ 25% Tariffs on Aluminum & Steel a Boon for Sector Stocks

Summary of Conference Call Notes Industry Overview - Industry: Metals & Mining, specifically focusing on Aluminum and Steel in North America [1][2][3] Key Points and Arguments 1. Tariff Proposal: President Trump proposed a 25% tariff on aluminum and steel, aimed at boosting domestic production and reducing reliance on imports [1][2] 2. Impact on Prices: The implementation of tariffs is expected to lead to higher domestic prices for aluminum and steel, with potential physical premiums increasing by up to 25% for local buyers, particularly in aluminum due to supply shortages [3][5] 3. Import Statistics: In 2023, the US was a net importer of approximately 4.5 million tons (mt) of aluminum (82% of refined demand) and 15.7 mt of steel (17% of domestic demand) [4] 4. Alcoa's Position: Alcoa is expected to benefit from the tariffs due to its US smelting operations, which account for 13% of its total capacity. The company can capture elevated premiums resulting from the tariffs [5] 5. Steel Producers' Outlook: All US steel producers are anticipated to benefit from higher tariffs, although low capacity utilization (70-75%) may limit immediate gains. The US has been increasing its steelmaking capacity, with 10.7 million short tons (mnst) added from 2020-2023 and another 10.5 mnst expected from late 2024 to 2027 [6][10] 6. Market Dynamics: A significant portion of imported steel (80-85%) comes from countries exempt from current trade protections, indicating that any new tariffs would need to target these exempted countries to be effective [6] Additional Important Insights - Long-term Capacity Development: Constructing new smelters and mills can take three or more years, suggesting that any tariffs applied now may not yield immediate results in terms of increased domestic production [3] - Potential for New Investments: Foreign companies, such as Hyundai Steel, are considering building plants in the US to avoid tariffs, indicating a potential shift in investment dynamics [10] - Valuation Methodology for Alcoa: The year-end 2025 price target for Alcoa is based on an EV/EBITDA multiple approach, with a target multiple of 6.3x, reflecting a cautious outlook amid volatility in alumina prices [15] Risks - Upside Risks: Stronger than expected demand for aluminum and alumina, operational improvements in bauxite/alumina businesses, and potential rationalization of refining and smelting capacity in China could positively impact the sector [17] - Downside Risks: Demand softening, operational setbacks in bauxite/alumina, and faster-than-expected restart of additional smelting capacity could negatively affect the sector [17]