Fog of trade war is just one of the issues making it hard for Hulamin to plan
First import tariff hikes against China, now sanctions against Russia: Donald Trump’s US has caused huge ructions in the world’s steel and aluminium markets. Business Day caught up with local aluminium product producer Hulamin and asked CEO Richard Jacob what effect these tectonic trade wars are having.
We’re like the milling company that mills the grain: the price of the grain, which is the LME (London Metals Exchange) aluminium price, doesn’t really affect us. Customers pay the aluminium price and we charge them a fee to convert raw aluminium that comes from a smelter such as South32 or Rusal. That’s our selling price.
So, to some extent, it doesn’t actually matter what the aluminium price is? If the LME moves up or down, that price gets passed on.
Hulamin’s shares have risen considerably in the wake of the Russian sanctions. But has the market misunderstood how sanctions may affect you?
There’s a lot going on in the aluminium space right now, particularly in the US. Think of the primary aluminium world as China and the West. Rusal is the biggest of the primary producers — it produces 40% of the western world’s primary aluminium.
What’s happened since Friday when Mr Trump announced
[the sanctions] is that aluminium is now going to be in short supply for the foreseeable future. It takes five to 10 years [for a new plant] to come on stream, and there’s not much idled capacity anywhere in the world. Who do you buy your aluminium from?
South32 in Richards Bay. This Rusal issue is only one of a number of regulatory changes that are happening. There are actually five things happening all at the same time … I imagine the trade “war” between US and China is one?
Trump invoked section 232 of the US constitution, which basically ensures that the defence industry in the US can source whatever materials it needs locally. In steel and aluminium, the Trump administration feels that the defence of the US is at risk because they’re too dependent on imports. On that basis he has applied a 10% duty on all imported aluminium and 25% on all imported steel. But does this affect you?
Yes it does. In terms of the WTO there’s a tariff code that applies to all traded goods, and South African products, including
all aluminium and steel, have duty-free access to the US market under Agoa. Everybody else, under aluminium tariff codes, has a 3% import duty.
But section 232 is superior to Agoa so while we don’t have to pay the 3%, our customers have to pay the 10%. But Trump has given temporary exemption to certain countries — for example, in the EU. They will still pay the 3% but no more than that. So we’ve gone from a 3% advantage to a 7% disadvantage. Will it be quite a big knock for you?
Well, 20% of our total sales go to the US. It’s neutral because our customers are paying the duty. But the next part of the puzzle is the US’s announcement on intellectual property rights. All our aluminium products are part of that blanket 25% duty. But this is very focused against China. The aluminium industry capacity in China has grown so fast and so much it’s impacted on market prices through oversupply and we’ve seen our selling prices in the US go down over the last three to four years because of oversupply from China. But because that’s been blocked, we’ve seen our prices rise quite sharply.
But if Russia is now out of the question, is China not necessary?
It’s a completely different issue. The Russian issue only affects primary aluminium. In the short term it looks quite positive for Hulamin, but there’s also an awful lot of dust floating around making things very uncertain and we don’t know from one week to the next what the next salvo is going to be.
In the very short term, our prices in dollars are rising quite nicely, but 80% of our business is not in the US. Long term we’re thinking this US market is quite risky. So we need to think about our strategy outside the US. Is it making life incredibly complex?
It’s making the future very uncertain. Up until all this noise we would have had some insight into what pricing we could expect over the next couple of quarters. Now it’s very uncertain, so forecasting, predicting and therefore investing is very difficult. Have you held back on any capex?
New products, new investments. We had one or two projects, feasibility studies that we’ve put on hold. It will take a while for the dust to settle, to see what trends emerge.
Back home, is Hulamin an obvious beneficiary of an uptick in consumer sentiment and economic activity in SA?
No. Only 30% of our sales are in Southern Africa; 70% of our sales are international. So for us what happens in the big wide world is more important than what happens locally.
What happens to the rand is what really affects our financial performance. It has by far the biggest impact.