Wittbecker on Aluminum: US-China trade war clobbers cross-Pacific trade

On April 23, Hapag-Lloyd indicated customers have canceled 30% of shipments to the United States from China.

Instead, there has been a “massive increase” in demand for consignments from Thailand, Cambodia and Vietnam.

Why this matters

Clearly, the pipeline of Chinese goods to the US is slowing quickly. However, there is obviously enough inventory in the pipeline that it has yet to show up in wholesale or retail inventories and, more importantly, replacement pricing. One would expect this to start showing up by June or July.

Equally important is that the sharp decline in eastbound container movement will impact westbound export movements. The availability and cost of containers for export should change dramatically.

Containers are the lifeblood of US obsolete scrap exports to Asia. A 30% decrease in supply will lead to much higher container charges outbound and reduce the netbacks to US exporters.

IEEPA tariffs begin to sink in

The International Emergency Economic Powers Act (IEEPA) 25% tariff on Canada and Mexico is starting to manifest across many manufacturing sectors.

This is most pronounced in Mexico, where a host of major manufacturing sectors are facing the reality of not being USMCA compliant on rules of origin. About 21% of Mexico exports to the US are produced with components sourced from China. These include:

1. Assembled automobiles and light trucks plus parts. The Mexican Association of the Automotive Industry (AMIA) says 8.2% of vehicles and 20.4% of auto parts do not meet 75% threshold for USMCA compliance.
2. HVAC. According to Prodensa, 52% of Mexico’s HVAC component imports originated in China.
3. Lighting fixtures. China is supplying a substantial share of LED components to Mexico assembly plants.
4. White goods. Sheet products, wiring harnesses and small horsepower motors originating in China.

Why this matters

Mexico has built tremendous momentum in its value-added manufacturing base through the maquiladora (IMMEX) program. This accounts for 65% of Mexican manufacturing and exports of $475 billion in 2023. This industrial base is not moving north of the border. However, this will place enormous burdens on IMMEX manufacturers to rotate sourcing of components to USMCA member countries to avoid getting hit with the 25% IEEPA tariffs.

It won’t be easy for some components that simply are not manufactured in any of the three countries. However, in terms of basic aluminum components, such as castings, sheet, plate and extrusions, options do exist, and they will have to be exercised quickly.