Month: February 2025

‘Cost and chaos’: Donald Trump’s metal tariffs sweep across corporate America

The FT and other media document how recent announcements will impact American businesses and consumers.

• “So far what we’re seeing is a lot of cost and a lot of chaos,” said Ford chief Jim Farley at an automotive conference on Tuesday.
• Futures tracking the Midwest premium — a vital benchmark for prices paid by US companies, which includes transport, tax and other costs — for settlement next month have jumped 25 per cent since the end of January, according to LSEG data. For steel, even businesses that do not import the metal will feel the tariffs’ impact as domestic mills increase prices. (FT)
• At Coca-Cola, aluminium and steel used in cans and bottles make up 26 per cent of drinks packaging worldwide. Chief executive James Quincey said new tariffs on aluminium imports could force the company to use more plastic bottles. (FT)
• The industry relies heavily on steel and aluminium for oil and gas drilling, pipelines, grid infrastructure and clean energy components such as wind turbines and racks for solar panels. “Unleashing American energy requires access to materials not readily available in the US,” said Dustin Meyer, American Petroleum Institute’s senior vice-president of policy, economics and regulatory affairs. (FT)
• Imports made up 40 per cent of US demand for pipes and other rolled metal goods, used by producers to drill wells, according to energy consultancy Wood Mackenzie.
• A typical car contains about 1,000 pounds of steel costing $6,000-$7,000 per vehicle. The 25% tariff could increase car costs by $1,000-$1,500. (CBS)
• “Many specialty steel products used in our [auto] industry are not readily available from domestic sources, making access to global supply chains essential,” Hanvey said in a statement. (ABC)
• “Let’s be real honest, long term, a 25-per-cent tariff across the Mexico and Canadian border would blow a hole in the U.S. industry that we have never seen,” Mr. Farley said. “And it frankly gives free rein to South Korean and Japanese and European companies that are bringing 1.5 million to two million vehicles into the U.S. that wouldn’t be subject to those Mexican and Canadian tariffs. It would be one of the biggest windfalls for those companies ever.” (G&M)
• The previous set of tariffs on aluminum cost the U.S. beverage industry $1.7 billion between 2018 and 2022, according to the Beer Institute, an industry trade group. (ABC)

Powell Says Fed Doesn’t Need to Rush on Rate Cuts Fed chair outlines paths for 2025: Hold rates steady if inflation doesn’t improve or cut if the economy slows more sharply

(…) “We’re in a pretty good place with this economy. We want to make more progress on inflation. And we think our policy rate is in a good place, and we don’t see any reason to be in a hurry to reduce it further,” Powell told members of the Senate Banking Committee. (…)

Looking ahead, Powell said the Fed could keep rates on hold for much longer if inflation doesn’t continue to move down to its target and the economy remains solid. He said the Fed could cut rates if the labor market weakened unexpectedly or inflation made faster-than-expected progress declining to its 2% goal. (…)

Powell also said that long-term inflation expectations appear “well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.” and stressed that the labor market was “not a source of significant inflationary pressures.”

Financial markets? No so sure, unless he meant anchored to the early 2000s:

Small Business Optimism Falls Back Slightly in January

The NFIB Small Business Optimism Index dipped 2.3 points in January following surges in November and December. Despite the setback, the index remains far above its prevailing level over the past three years. Most of the recent improvement, which coincided with the 2024 election outcome, was driven by the “softer” index components surrounding economic expectations and credit conditions. The “hard” components of the index, e.g. job creation plans, job openings and capex plans, remain muted compared to pre-pandemic norms. On the upside, labor market deterioration appears to have stalled amid a sideways movement in job openings and slight improvement in hiring plans. On the downside, small businesses are experiencing little relief on the inflation front. Owners also expressed a pickup in general uncertainty, possibly driven by recent volatility in tariff announcements. (…)

 

China’s Cabinet Pledges to Boost Spending, Attract Foreign Investment It will intensify support for trade-in programs while boosting spending in the cultural, sports and inbound-tourism sectors

In a weekly meeting chaired by Premier Li Qiang, the State Council said Monday that it will work to increase residents’ incomes, promote sustainable income growth and expand property-related income channels, all of which are aimed at stimulating domestic consumption.

The government didn’t provide specific details on how it plans to raise incomes, but analysts expect that the central government will likely propose enhanced pension and healthcare coverage at the coming annual legislative meeting in March. Next month’s meeting is also expected to unveil China’s economic growth target along with other supporting policies. (…)

In Monday’s meeting, the State Council said the government will intensify support for trade-in programs this year while boosting spending in the cultural, sports and inbound-tourism sectors.

According to data released Monday by the National Development and Reform Commission, the trade-in initiatives launched so far have spurred sales of automobiles, home appliances, furniture and various digital products.

During the eight-day Lunar New Year holiday, these programs generated more than 31 billion yuan in revenue, equivalent to $4.24 billion, with home-appliance and mobile-phone sales surging 166% and 182%, respectively, compared with the previous year.

While these trade-in programs have temporarily lifted spending, economists warn that their impact may gradually fade as the year progresses. (…)

• China Mulls $6.8 Billion Funding to Help Vanke Repay Debt Special local bonds to be used to buy unsold homes from Vanke

Under the plan, regulators would allocate 20 billion yuan of special local government bond quota for the purchase of unsold properties and vacant land from Vanke, said the people, asking not to be identified discussing private information. The money would enable the Shenzhen-based developer to pay public and private debt due this year, the people added.

Vanke and its affiliates would also be allowed to tap other financing sources including new bond sales and bank loans for debt payments, the people said, adding that the details of the plan could still change. It couldn’t be determined if Vanke has started any work on specific bond issuance.

The proposed financial backing is a further sign that Beijing is drawing a line in the sand for Vanke so that the state-backed developer doesn’t suffer the same fate as China Evergrande Group and other private firms that defaulted on their debt in recent years. Vanke is facing a funding gap this year as the cash-strapped developer has $4.9 billion of bonds maturing or facing redemptions at a time of slumping home sales and limited access to fresh liquidity. (…)

The developer said it has 36 billion yuan of public debt due this year and has repaid 3 billion yuan in January.

Other than publicly issued debt, Vanke also had 91 billion yuan of short-term bank loans and borrowings<?XML:NAMESPACE PREFIX = “[default] http://www.w3.org/2000/svg” NS = “http://www.w3.org/2000/svg” /> from financial institutions outstanding by the end of September, according to its financial report.

The local government of Shenzhen last month stepped in to take management control of Vanke, which warned of a record $6.2 billion loss for 2024, and vowed to “proactively support” its operations. Vanke received a 2.8 billion yuan loan this week from its largest state-owned shareholder, Shenzhen Metro Group Co. (…)

“It seems we can rest assured that there will be no more defaults, at least not by any SOE developers from here,” said Zhu Zhenkun, a fund manager at Hainan Shire Asset Management Co. He added that the size of the support and government’s resolve exceeded his expectation. (…)

As China’s housing crisis extends into its fourth year and dozens of private companies have defaulted, authorities are trying to ring-fence state-backed developers like Vanke. Vanke operates across the country and has deep roots as just the second company to list on the Shenzhen Stock Exchange in 1991.

A default by the bellweather firm would batter home sales further and erode confidence in other state-controlled builders such as Poly Developments and Holdings Group Co. and China Overseas Land & Investment Ltd., which are now the country’s biggest developers by sales. Vanke, which employs about 130,000 people, ranked fifth by sales last year. (…)

Residential sales resumed falling in January, suggesting the property sector has some way to go before it can show a sustained recovery. The value of new-home sales from the 100 biggest real estate companies dropped 3.2% from a year earlier to 227.6 billion yuan. Sales were also flat in December, according to data from China Real Estate Information Corp.

• China’s Property Crisis Enters a Dangerous New Phase

(…) The unprecedented intervention has triggered a sigh of relief in markets, but it also underscores a somber reality: The property crisis that hobbled China’s economy and created a nearly $160 billion pile of distressed debt — the world’s largest — is getting worse.

Signs of trouble are now popping up everywhere. A brief revival in home sales has fizzled despite multiple rounds of stimulus from President Xi Jinping’s government. Chinese bankers have mostly stopped lending to real-estate projects outside major cities such as Shanghai, according to people familiar with the matter. And international creditors are losing patience: More debt restructuring deals are unraveling and at least a dozen developers face petitions to liquidate, including once-storied names like Country Garden Holdings Co.

The pain is also spreading to Hong Kong as Chinese homebuyers and tourists pull back. New World Development Co., a real-estate giant controlled by one of the financial hub’s richest families, is racing to sell assets and mortgage some of its marquee properties as losses mount. (…)

The resulting crash in the market led to the destruction of $18 trillion of household wealth, by one analysis. Home prices have plunged about 30% from their 2021 peak, according to economists. The housing sector has seen its contribution to the economy shrink from about 24% to 19%. (…)

The depressed housing demand is derailing the progress of defaulters which were seemingly recovering. Sunac China Holdings Ltd., whose successful debt restructuring in 2023 was hailed as a role model by creditors, recently said it “can’t rule out” a second overseas restructuring as market conditions are worse than expected.

The list goes on. Fellow defaulter China Fortune Land Development Co. is mulling scrapping a creditor-approved debt plan for a court-led solution, a rare approach for developers in China, people familiar with the details said in January. The developer declined to comment at the time on the Bloomberg report. Liquidation petitions are piling up again at Hong Kong’s court, with targets including Shimao Group Holdings Ltd., once one of the nation’s biggest builders, in recent weeks. (…)

Yet, lending for projects outside of key cities, such as Shanghai and Hangzhou, have more or less been suspended, according to bankers involved in the business who declined to be identified discussing confidential matters. Getting on the White List is no guarantee to secure loans, with banks scrutinizing the viability of projects as they weigh the risks for them, the executives said. (…)

Less than 10% of loan applications were approved for one of the largest Chinese developers on the White List, an executive said, declining to be identified discussing confidential matters. For all the support, Chinese builders received 6.1% less funds from banks last year, a fourth consecutive annual drop, official data show.

“Properties in second and third-tier cities are not selling well,” said Yang Junxuan, a fund manager at Shanghai Junniu Private Fund Management Co. “We’re worried that developers’ liquidity may break one day.”

The impact of a weak Chinese economy is also rippling across into Hong Kong. New World borrowed heavily to fund mega retail and commercial projects such as 11 Skies and Victoria Dockside to capitalize on spending by tourists and companies from China. It also acquired land across the border.

But, with retail spending plunging and Chinese companies rushing to sell office towers in Hong Kong, the average prices of commercial buildings, shopping malls and other properties have fallen more than 40% from their highs in 2018. (…)

It seems we are entering the final chapter of this long, slow moving, saga. Beijing is busy trying to write a happy ending. It cannot afford anything else.

AI CORNER

Ex-Google chief warns west to focus on open-source AI in competition with China

Former Google chief Eric Schmidt has warned that western countries need to focus on building open-source artificial intelligence models or risk losing out to China in the global race to develop the cutting-edge technology. (…)

“If we don’t do something about that, China will ultimately become the open-source leader and the rest of the world will become closed-source,” Schmidt told the Financial Times.

The billionaire said a failure to invest in open-source technologies would prevent scientific discovery from happening in western universities, which might not be able to afford costly closed models. (…)

Worth your time. An interview with ASML CEO: https://open.spotify.com/episode/4ZCwppZ0bf1wnDsD4T8V73?si=j5zKky82Qwm7E6D4VWSkOA

You Like to Bet on Sports? Here’s a Reality Check. Study finds that the average bettor expects to make a little money on future bets, even though the average result is a loss of 7.5 cents per dollar

(…) A new study by Stanford University researchers finds that the average online sportsbook customer expects a gain of 0.3 cent for every dollar wagered. In reality, sports bettors lose an average of 7.5 cents per dollar wagered, reflecting “widespread overoptimism about financial returns,” according to Matthew Brown, a Stanford doctoral student and lead author of the study. (…)

In the 30 days before the study began, the median participant wagered $153 a week, though more than 25% of participants bet more than $1,000 a week. The median participant placed 17.4 bets a week at an average bet size of $10.30. (…)

“We found that people more or less understood the amount of money they had lost in the past, but they just thought the future would be better,” Brown says. (…)

Wanna bet on that?

The Truth About Trump’s Steel Tariffs His first-term levies hurt consumers and U.S. manufacturers.

President Trump gave the economy another jolt of uncertainty on Monday when he signed executive orders imposing 25% tariffs on all steel and aluminum imports. His advisers say these tariffs are economically “strategic” rather than a bargaining chip for some other goal. Is the strategy to harm U.S. manufacturers and workers?

That’s what his first-term tariffs did, and it’s worth revisiting the damage of that blunder as he threatens to repeat it. In March 2018, Mr. Trump announced 25% tariffs on steel and 10% on aluminum under the pretext of protecting national security. Then, as now, most U.S. metal imports came from allies including Canada, Mexico, Europe, South Korea and Japan.

Mr. Trump said tariffs were needed to boost domestic steel and aluminum production. But U.S. production was already increasing amid a surge in capital investment unleashed by his deregulation and 2017 tax reform. U.S. steel capacity utilization climbed to 78.5% in March 2018 from 72.4% in December 2016.

The real goal of U.S. steel and aluminum companies that wanted the tariffs was to boost their bottom lines. Raising prices on foreign imports allowed them to charge more. The price was paid by U.S. secondary metal producers and downstream manufacturers.

Consider Mid-Continent Steel and Wire, which produced roughly half of the nails made in the U.S. After the steel tariffs took effect, its sales plunged by more than half, causing it to lay off 80 workers. Another 120 quit because they worried its Missouri factory might close. After this damage, the Commerce Department granted the company a tariff exemption.

Auto makers were another casualty. Ford Motor said tariffs subtracted $750 million from its bottom line in 2018, which reduced profit-sharing bonuses for each of its workers by $750. GM said the tariffs dented its profits by some $1 billion, equal to the pay of more than 10,000 employees.

The tariffs also made U.S. manufacturers less globally competitive and prompted retaliation that hurt American businesses. Canada imposed tariffs on $12.8 billion in U.S. products, including 25% on steel and 10% on aluminum. Harley-Davidson shifted some production to Thailand to avoid Europe’s retaliatory tariffs on U.S. motorbikes.

Retaliation caused Mr. Trump to exempt Canada and Mexico as part of the renegotiated Nafta deal. His Administration also struck deals with some countries that exempted a certain amount of their steel and aluminum exports.

Even so, the tariffs created uncertainty for U.S. manufacturers and boomeranged on steel and aluminum companies. Employment in durable goods manufacturing began to decline in early 2019, which reduced demand for steel and aluminum. Employment in fabricated metals manufacturing that used steel and aluminum plunged and is still some 35,000 lower than when the tariffs took effect. (…)

Domestic steel-making capacity utilization has fallen back to 70%, about the same as in 2016.

Which is why U.S. steel and aluminum producers now want tariffs with no exemptions. They blame imports for reducing prices. But steel prices are about 50% higher than pre-pandemic levels and aluminum prices a third higher. Cleveland-Cliffs shares rose 17.9% Monday, and other steel makers by 5% or so in expectation of windfall tariff profits.

This is political rent-seeking at its most brazen, and it benefits the few at the expense of the many. None of this matters to Mr. Trump, whose dogmatic views on tariffs can’t be turned by evidence. But we thought our readers would like to know the rest of the story.

• Why Trump Wants Higher Tariffs on Steel and Aluminum

(…) The president said the tariffs would apply to “everybody” — meaning all nations. The levies will also cover finished metal products, a significant move that will have broad-reaching price impacts on US consumers.

Tariffs imposed during Trump’s first presidential term focused mostly on basic steel and aluminum products, whereas the latest tariffs will include things like metal shapes and processed goods that are needed to build automobiles, window frames and skyscrapers among other things. (…)

When Trump’s first administration unveiled tariffs on steel and aluminum, the goal was to make the US more self-sufficient in these metals. But in 2024, the output of the US steel industry was 1% lower than it had been in 2017, before the first round of Trump tariffs, and the aluminum industry produced almost 10% less.

Rising costs — especially for labor and energy — have been a major driver in the long-term decline of these industries. Canada plays a vital role in supplying aluminum to the US because its plants often draw on cheap hydropower.

Economists warn that Trump’s tariffs risk raising household expenses such as groceries and gasoline — potentially stoking the very inflationary pressures the president campaigned on quelling. Administration officials counter that the levies are part of a broader economic strategy — including extended tax cuts and expanded domestic energy production — that will help lower costs overall.

John Authers:

(…) Are there valid concerns that Trump’s proposed retaliatory measures would include China? A Bloomberg Economics analysis points out that China’s effective tax rate on US goods is still lower than Washington’s levies on Chinese products. Taking at face value Trump’s plan for “reciprocal” tariffs that affect “everyone,” the threat to China is more bark than bite, Bloomberg’s Chang Shu and David Qu argue. There’s no room for US duties on China to rise under a strictly applied “reciprocal” approach. True reciprocity would require him to cut tariff rates:

Our analysis suggests the US would have to reduce tariff rates on China, reflecting China’s low tariffs. Does this mean China is off the hook? No. Our view is that Trump is holding his biggest punch for China. We still expect US tariffs on Chinese goods to rise further, though it’s not clear if they will hit the 60% level Trump has threatened. Tariffs staying at current levels could mean the impact on China would be contained, especially if the US raises tariffs on other trading partners.

A further important point is that this is not like some cliff edge. The two countries have been adapting their trade relationship since at least 2018, and China’s realignment is on course. The share of US imports from China has steadily declined while Beijing has sold more and more to the rest of the world:

(…) It looks like markets are taking this threat more seriously. Even before the announcement, commodity prices were shifting in the US as traders rushed to stockpile before tariffs take effect. This trans-Atlantic price disparity between copper on New York’s Comex and the London Metal Exchange is unmissable:

(…) As shown by Apollo Global Management in this chart, Chinese exports to the US these days are dominated by electronics and computer products: (…)

Goldman Sachs:

• This policy impacts the cost of importing aluminum into the US, but has no direct impact on the LME price in London.

• We believe that the 25% increase in the price of the marginal imported tonne will need to flow through to domestic prices in order to (1) increase domestic utilisation rates (to the extent that they can) and (2) keep the required imports flowing. This implies that we see upside to 2025H2 US HRC futures. Even after Monday’s (10 February) rally, the December US contract ($862/st at time of writing) is priced 18% above the last week’s CRU spot index ($728/st), with further to run.
• We expect most of the tariff to transfer to the US domestic steel price, as was the case after June 2018 when imports from the EU, Mexico and Canada came under the S232 duty (following an initial exemption). In the short run, high inventories at US service centres (>2.2Mt) following a restocking in December and low shipments could slow the rally in spot prices. However, ultimately, we do not believe that US steel imports can be fully replaced by domestic production, despite the relatively low import dependence. First, while there is spare US steelmaking capacity, there are limitations in bringing all idled US capacity back online. Second, there are mismatches between domestic spare/new capacity and demand in terms of types of steel products. Even when US domestic steel prices soared to almost triple today’s prices in 2021, the US capacity utilisation rate did not exceed 85%.
• We see no direct impact on supply, and limited substitution risk. Duties have not been an effective way to lift primary aluminium production. US primary aluminium production is now lower than when tariffs were initially imposed and not much above the lows seen in 2016, when the LME price averaged $1,610/t. At present, there are two idle aluminium smelters in the US with a combined capacity of 0.3 million tonnes pa, neither of which we think will restart (for reference, global primary aluminium production is 73 million tonnes). The main barriers to restart is difficultly securing long-term competitive power contracts, as well as trade policy uncertainty.
• While we do not think that the tariffs would result in imports being fully replaced by domestic production (due to aforementioned reasons), we do expect some increase in US steel production as new capacity comes online. This would likely lead to a fall in imports (to an extent), as occurred when the S232 tariffs were imposed in 2018 (although domestic production also declined over the same period). Much of this new capacity is the result of investments following the 2021 steel price rally, including more than 4Mt from US steel (Big River 2), Nucor and CMC. It is also likely that the capacity utilisation of existing capacity gradually increases (as it did in 2018). This increase is most likely to come from capacity recently idled (over the past year) in response to low demand and prices. For example, in Q4 2024 Cleveland Cliffs idled 1.5Mt capacity No. 6 blast furnace at its Cleveland Works, Ohio (already announced to be coming back online). While this should help US imports to decline to an extent over the coming years (if the new tariffs remain in place without exemptions), this would require higher domestic prices (vs. today).
• (…) not including copper today increases the chance that copper will go through a S232 type investigation, possibly delaying tariffs by 9-12 months. We believe the US copper price is overestimating the probability of tariffs in the short-term.

Trump’s Early Tariff Wins Mask Future Risks The president’s trade policies may have unintended hazards, ranging from stagflation to the erosion of US influence on the global stage.

(…) Given recent developments, the Trump administration’s tariff plan can be thought of as evolving to focus on three major components: tariffs on a range of countries where the main goal would be revenue generation and better trade reciprocity; a much narrower overlay of additional duties aimed at protecting certain segments (such as steel and aluminum); and the periodic threat of much higher levies on individual countries to meet political objectives.

This multi-pronged approach promises to deliver immediate gains. Indeed, as evidenced by the spat with Colombia just over a week ago, America’s many structural advantages and its bigger and cyclically stronger economy give it the upper hand in most negotiations. The prospect of more quick victories means we can expect tariff threats to continue in the period ahead. This will not be a linear or predictable process. Indeed, as Annmarie Hordern noted on Bloomberg Television on Monday, “uncertainty is a feature rather than a bug” of the current approach.

The short-term gains for the US will come with risks. Depending on the response from US households, targeted countries and companies on both sides, tariffs can be stagflationary, contributing to cost increases while slowing growth. This impulse could be stronger now than during Trump’s first term, given the fragility of low-income consumers and the extent to which companies were hurt by the unanticipated surge in inflation that followed the pandemic. (…)

If used repeatedly, both the threat and the reality of tariffs can inflict collateral damage and have unintended consequences. Making America a less reliable partner could result in fewer bilateral interactions and the gradual erosion of the US’s role at the core of the international system.

Viewed through the lens of game theory, trade is an intrinsically cooperative game. Playing it uncooperatively can benefit the more powerful party in the short term. This is where the US is today, able to use a multi-pronged tariff policy to pursue multiple economic, financial and political objectives with immediate success. But the longer that international trade is played as an uncooperative game, the bigger the welfare losses to everyone participating, including the US.

NY Fed Survey Sees Inflation Expectations Edge Up Before Tariffs

Expected inflation five years ahead rose to 3% last month, the highest since May 2024, according to results of the New York Fed’s Survey of Consumer Expectations published Monday. Expected inflation rates over the next year and three years ahead were both unchanged from December at 3%. (…)

Preliminary results of a monthly University of Michigan consumer survey published Friday also showed expectations ticking up. In that poll, expected inflation over the next year jumped to 4.3%, while anticipated inflation five to 10 years ahead rose to 3.3%.

The New York Fed survey showed a rise in inflation expectations for various items over the next year, including gas, food, medical care, college tuition and rent. It also revealed a growing divergence among respondents over estimated inflation in the year ahead, with the gap between the 25th- and 75th-percentile respondents widening to the largest since mid-2023. (…)

Expectations for growth in household spending fell in January to a four-year low and respondents reported more pessimism about their financial situations. Even so, the perceived probability that the unemployment rate would be higher a year from now also fell, to the lowest level since July 2021.

Results of a separate survey published Monday by the Cleveland Fed indicated chief executives and other business leaders polled in January said they expect the consumer price index to rise 3.2% over the next 12 months, down from 3.8% in October.

Donald Trump to halt enforcement of law banning bribery of foreign officials President says move will ‘mean a lot more business for America’

Donald Trump has ordered the Department of Justice to halt the enforcement of a US anti-corruption law that bars Americans from bribing foreign government officials to win business.

“It’s going to mean a lot more business for America,” the president said in the Oval Office after signing an executive order on Monday directing Pam Bondi, the US attorney-general, to pause enforcement of the 1977 Foreign Corrupt Practices Act. (…)