How Trump’s Tariffs Tripped Up Alcoa

Posted July 19, 2018 8:23 p.m. EDT

U.S. corporations are sending in the first reports from the front lines of President Donald Trump’s trade war, and in some cases, investors don’t like what they are seeing.

Alcoa, the 130-year-old aluminum producer, said Wednesday that the Trump administration’s aluminum tariffs, imposed at the beginning of June, were adding to its costs. That, in part, prompted the company to lower an earnings forecast. Alcoa’s shares slid 13 percent Thursday.

The company’s second-quarter results Wednesday, as well as comments by Alcoa executives on a conference call, revealed new information about how the steel and aluminum tariffs were hurting the very companies they were intended to protect.

About half of Alcoa’s sales are booked in the United States, but a smaller share of its assets are in the country. The Trump administration’s tariffs hit Alcoa when it sells aluminum produced in its overseas plants, predominantly those in Canada, to customers in the United States.

On a call Wednesday to discuss second-quarter earnings, Alcoa’s chief financial officer, Bill Oplinger, said the aluminum tariffs, which the Trump administration set at 10 percent, would increase Alcoa’s costs as much as $14 million a month. Alcoa’s total hit this year could total about $100 million.

That’s about 12 percent of the $822 million in pretax profits that Alcoa made in the first half of the year. It’s sizable, but not a crippling blow.

But the tariffs also come at a time when other factors are weighing on Alcoa’s business.

The company on Wednesday reduced by $500 million its 2018 forecast for adjusted earnings before interest, taxes, depreciation and amortization, a profit measure that excludes several expenses. The estimated hit from the tariffs accounts for about 20 percent of that reduction, but the company also blamed the lowered forecast on changes in market prices, higher energy costs and operational issues.

The tariffs have also helped Alcoa and other producers by pushing the overall price of aluminum up in the United States. But it’s not clear whether the increase will be sustained. Buyers rushing to purchase aluminum before the tariffs were imposed may have helped drive prices higher.

Proponents of Trump’s tariffs on metals hope they will lead to more production by steel and aluminum producers in the United States. No longer having to compete so fiercely with subsidized foreign producers, U.S. producers may be able to invest more and expand. One way that may happen is if producers fire up dormant operations. But Alcoa’s chief executive, Roy Harvey, said Wednesday that, if all inoperative facilities at U.S. producers were revived, the United States would still need to import the “vast majority” of its aluminum needs.