The election of Donald Trump surprised pundits and markets. After the initial shock subsided, however, the outcome prompted strong gains in the stock market. Investors seem to expect President-elect Trump's pro-US and pro-business stance to benefit US companies.
The metals and mining sector has registered particularly strong gains: the Index of US metals and mining companies rose by more than 7% the day after the election. The market’s sentiment seems to be that infrastructure and corporate investment (encouraged by anticipated corporate tax cuts) in combination with protectionist trade policies could benefit an industry hard hit by weak demand growth and aggressive competition from low-cost imports. A sober look at the probable impact of the President-elect's key policy intentions, however, strongly suggests that the new administration's policies will not extricate the US metals and mining industry from its broader macroeconomic difficulties.
In this white paper, we will discuss the potential impact of President-elect Trump's key policy intentions (to the degree that these are identifiable today) regarding demand for and supply of raw materials and semifabricated metals, with a particular focus on steel, aluminum, copper, iron ore, coal, and scrap. We will outline key impacts and implications of the future administration’s policies on industry players’ relative costs, and conclude with a summary of actions that metals and mining players need to adopt to be successful in the face of the long-term structural challenges.
In the near term, we expect President-elect Trump’s expressed policy intentions to have a positive overall impact on domestic US demand for metals and minerals. Most notably, an increase in infrastructure spending due to direct government stimulus efforts and a corporate tax rate reduction would encourage a significant increase in demand across all metals and minerals. Our preliminary projections include the following:
Steps toward industry deregulation would slightly benefit demand across metals and minerals, to the extent that customer industries see a boost from the greater ease of doing business. The administration’s plans on energy policy would likely slow the decline in demand for thermal coal, as the EPA might not pursue the currently reviewed Clean Power Plan, delaying reductions in coal-based power generation capacity. But coal will continue to compete with domestic natural gas for market share as a fuel source, and reduced regulations governing fracking and other extraction and production methods on the natural gas side are likely to boost its attractiveness, too. As a result, we do not expect to see a reversal in the trend of declining coal demand.
Although exports make up a small portion of total demand, a stronger dollar would tend to make US production less competitive, leading to reduced demand from overseas industries for metals and minerals. Currently, the following conditions prevail:
Specialty metals with defensible differentiation based on technological advantage will be less susceptible to reciprocal trade barriers or currency effects, and should be able to maintain—and potentially increase—their production and sales volumes.
On the supply side, we expect the effect of the Trump administration’s expressed policy intentions to be broadly neutral over the short to medium term. Given the long-term nature of investment in metals and mining capacity, and the possibility that the administration’s immediate policy changes may be reversed later, significant investment in new capacity is unlikely. This is especially probable because reduced international competitiveness due to a stronger dollar is likely to significantly offset the benefits of reduced tax rates, more-competitive factor costs, and more-protectionist trade policies.
Various elements of President-elect Trump's expressed policies, if adopted, would increase incentives within the industry to invest in new capacity. Three policy elements are especially relevant:
The new administration’s policies are unlikely to have a major impact on relevant wage rates, however, because the industry’s workforce is largely unionized.
Meanwhile, a stronger US dollar would tend to make American exports less competitive and would increase the market appeal of imports from already oversupplied, low-cost producing countries.
The President-elect has promised to pursue protectionist trade policies, saying that he will walk away from existing trade agreements and will impose tariffs and trade restrictions to protect the domestic industry. It is far from clear, though, that the new administration’s protectionist tendencies will meaningfully reduce the level of imports, since trade cases already provide a tool to combat dumping, and imposing blanket tariffs from the US side might trigger reciprocal tariffs that would hurt US exports and thus GDP growth. Nevertheless, some preliminary observations are possible:
The investment time horizon for significant new metals and mining capacity is 10 to 15 years, and sometimes longer. In light of that fact—and the prevailing uncertainty as to how these factors will play out over time—we are unlikely to see any significant change in the trajectory of productive capacity. A restart of some idled capacity might occur under favorable circumstances, but lack of domestic capacity would make it difficult to impose restrictions on imports of other materials:
Although the President-elect’s strategy for dealing with offshoring is not yet clearly defined, he has expressed strong opposition to the practice in various public remarks. A generally hostile policy toward offshoring could saddle companies that have global supply-chains with additional costs. For example, aluminum and specialty players could face import tariffs on bauxite, primary and semi-finished fabricated aluminum, and other globally sourced import materials.
In sum, we expect US metals and mining companies to benefit only slightly from President-elect Trump's expressed policy intentions. As enunciated, his domestic policies would positively affect demand and US dollar–based costs. But a stronger US dollar would hurt exports, and any significant move toward more-protectionist trade policies would likely do little to slow the rate of import growth in the medium to long term.
We recommend that industry leaders, in planning for the future, focus on six key areas:
Faced with an as yet highly unpredictable new administration in Washington, DC, that promises major changes in the White House’s relationship to the industry, metals and mining companies need to proceed cautiously, adapting to the new policies that the administration establishes without losing sight of the initiatives they have been pursuing in response to long-term structural challenges. As the Trump administration’s policies and their effects begin to crystallize, industry leaders can make decisions based on a clearer sense of where the national and global economies are headed.
John Slaven is a partner and managing director in the New Jersey office of The Boston Consulting Group. He is a core member of the firm’s metals and mining leadership team. You may contact him by e-mail at firstname.lastname@example.org.
Christian Barthel is a principal in the firm’s New Jersey office. He is a core member of BCG’s metals and mining leadership team, and of its industrial goods and corporate development practice areas. You may contact him by e-mail at email@example.com.