The maths doesn’t work: Alcoa boss on diverting its delivery trains after Trump’s tariff hit
Several months later and with punishing aluminium tariffs locked in place, Oplinger has dramatically diverted at least some of his trains.
As Trump’s 25 per cent tariffs on steel and aluminium escalated jumped to 50 per cent, Aloca quietly diverted more than 100,000 tonnes of aluminium from its hydro-powered Canadian smelters and sent it to other countries. For context, last year Alcoa shipped about 225,000 tonnes a quarter from Canada to the US. This represents aluminium that ordinarily would have gone to customers such as carmakers or manufacturers.
The reason?
“The math doesn’t work currently,” Oplinger says. “And anywhere we can take advantage of that, we will move tonnes to other destinations,”
It’s one of the first revealing insights into how big companies at the front line of Trump’s tariffs are attempting to navigate the new financial world.
For many businesses it comes down to how they can balance the financial cost of tariffs while keeping Washington onside.
At Alcoa, which is jointly listed on the ASX, it continues to be a tough call. In its latest earnings update, the metals major calculates the earnings hit from tariffs was $US115m ($177m) during the June quarter. It expects another $US90m hit in the September quarter.
It’s not all negative. Like copper prices surging when Trump threatened 50 per cent tariffs on the key metal, aluminium prices have also begun rising – but not by enough.
Oplinger calculates it needs to be around US75c a pound to break even with the cost of tariffs. Currently, it’s sitting at between US67c to US68c a pound inside the US, which is the highest level since 2013 and a premium to global prices. Alcoa has long-term supply contracts with major customers, which limits its ability to quickly pass on higher prices.
The impact of tariffs and subdued global prices resulted in Alcoa’s second quarter underlying earnings falling sharply, coming in at $US313m. This was down from $US855m from the March quarter.
If the US benchmark – the Midwest premium – moves to US75c, it will be a net neutral cost for Alcoa.
“There’s a big ‘however’ there,” Oplinger says. “Our customers in the US are seeing significantly higher prices than anywhere else in the world.
“If you assume that they can pass that on to their customers, then I guess that’s net neutral to them, but somebody ends up eating that tariff cost.
“There are dedicated supply chains from Canada to our customers, literally trains that go from door to door from our plants to our customers. Our belief is that it makes the most sense for the industry to have metal being able to flow from Canada to the US with either a lower tariff or no tariff at all.”
This week, Rio Tinto revealed its tariff hit was US$300m during the June half year. The mining giant, which also this week named a new chief executive, is one of Canada’s biggest aluminium producers. Like Alcoa, Rio said US aluminium prices are rising at the 25 per cent tariff level, but haven’t fully covered the 50 per cent tariff by the end of June.
Other ASX companies set to come clean on Trump’s tariff hit in coming weeks include packaging major Amcor, building materials play James Hardie and Australian steelmaker BlueScope.
Mobile tower productivity
How can Australia become a more productive economy? This has been exercising the minds of top financial officials for some time and now Treasurer Jim Chalmers is getting serious about it.
Over the past six months the Productivity Commission has put the challenge out to corporate Australia about how to create a more dynamic and resilient economy. The responses are in, and the big issues can be broadly placed into two buckets: taxes and states. Very often the two issues overlap.
The Productivity Commission’s interim report is due to be released on July 28. This is just in time for Chalmers’ August roundtable in Canberra about how to lift lagging productivity.
Vicki Brady’s Telstra says that to flourish, Australia needs to embrace the AI economy. The technology has the potential “to diffuse into all sectors of Australia’s economy and significantly progress Australia’s productivity agenda”.
This is consistent with Brady’s recently unveiled longer-term strategy, Connected Future 30, in which she talked up the telco delivering the network to enable AI through the economy.
Still, in its submission to the Productivity Commission, Telstra identified some more real-world frustrations.
That’s the overlapping institutions involved in regulating the telco sector, be it competition, licensing, construction or planning. Combined, the approach to regulation across jurisdictions is often “in a siloed manner” without any obligation to broader national policy objectives.
And while policy initiatives often start with the best of intentions, they are often grounded down between the conflicting objectives of different government departments and agencies.
“Each institution is naturally inclined to focus on their existing powers, budgets and regulations, and how these might be made more ‘effective’ from their own individual lens – rather than on how they might be able to deliver positive overall change in terms of the economic and social benefits the telecommunications industry generates.”
Telstra uses the example of the $1bn federally funded Mobile Black Spot Program. The scheme is now more than a decade old, and was set up by the then Rudd/Gillard government to address a need for improved mobile phone coverage in regional Australia by helping to subsidise the cost of building a new tower with telcos.
But Telstra says a number of sites it has under way are “stuck in ongoing loops of local and state planning approvals”. Seven sites are still unable to progress due to planning issues stretching back to 2019. Other sites made it through the planning process but have been held up by the need to connect power to the sites – which can take up to two-and-a-half years.
There’s at least four co-funded sites which are built and ready to go but cannot be switched on because of delays to power connections, Telstra says.
Elsewhere, Woolworths has pointed to the patchwork of regulations between jurisdictions – often inconsistent – which is holding Australian businesses back.
At the same time, state-based taxes such as payroll, land tax and stamp duty collectively come at a cost to jobs, the retailing major says. “The cumulative impact of these varying rates of taxation is an impact on the economic dynamism of those state economies – meaning it may be more difficult to make new investments financially viable,” it says.
Woolworths has opened the door for a debate on the GST being applied evenly to all goods, by removing the exemption on unprocessed food. Woolworths says managing what’s in and out of the GST represents a cost to retailers. This is likely to be politically unpalatable, however it is important for businesses to come to the table with ideas. Missing from the Productivity Commission’s batch of submissions are some of the loudest corporate voices on reform, including BHP and Wesfarmers. International-focused investment bank Macquarie Group has also opted to sit on the sidelines.
Matt Comyn’s Commonwealth Bank says in its submission that tax reform needs to be part of the answer to the productivity puzzle, and this involves lowering Australia’s dependence on income tax.
CBA broke ranks with other big businesses, arguing that lowering the corporate tax rate shouldn’t be a priority.
Instead, other tax reform measures, appropriate levels and a role for GST, and wealth taxes should be debated. The bank also says reducing tax concessions to nonproductive parts of the economy would be a way forward.
johnstone@theaustralian.com.au
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