Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / How Aluminum Tariffs Are Reshaping Base Metal Flows
Transcript
- Lucas: So the big story this morning isn't just that the U.S. slapped a 25 percent tariff on most Brazilian goods — it's how that tariff is already warping the base metals market before the first day of trading is even done. Luna: I saw the headline. But the immediate reaction in commodities seemed more about copper and aluminum than soybeans or orange juice. Why metals? Lucas: Because Brazil is the third-largest supplier of unwrought aluminum to the United States. About 12 percent of our primary aluminum imports come from Brazil. When you hit that with a 25 percent surcharge, you're not just raising costs for U.S. fabricators — you're creating a price wedge between the London Metal Exchange, where global pricing happens, and the CME's Midwest premium contract. Luna: So traders are buying LME aluminum and selling CME aluminum, betting that the Midwest premium spikes to compensate for the tariff? Lucas: Exactly. And that's exactly what we're seeing in the early screen. The Midwest premium — the upcharge over LME cash for physical delivery in the U.S. — already widened by about 2 cents a pound in the overnight session. That may not sound like much, but it's a 4 percent move in a single night for a market that usually grinds. Luna: And copper is up again — we're looking at six dollars thirty-nine cents a pound. That's a 2.5 percent gain over five days. Is that tariff-linked too? Lucas: Indirectly. Brazil isn't a major copper exporter to the U.S. — Chile and Peru dominate that. But the broader protectionist signal matters. When the U.S. levies a blanket tariff on a large emerging economy, capital rotates. Some of that rotation lands in industrial metals that benefit from domestic infrastructure spending and reshoring. Copper is the poster child for electrification and grid buildout. The tariff reinforces the narrative that the U.S. wants to onshore supply chains, and that means more copper-intensive domestic production. Luna: So gold is stuck around four thousand twenty-nine dollars, up less than one percent in five days, while copper is ripping. That feels like a real regime shift — industrial demand trumping safe-haven demand. Lucas: That's the key takeaway. Gold has been rangebound because real yields are still positive — the ten-year breakeven inflation rate dipped to 2.23 percent yesterday. Meanwhile copper is pricing in a physical tightening. The tariff might initially seem bearish for metals — higher costs, lower demand — but the market is reading it as bullish for domestically priced metals because the substitute effect pushes buyers toward non-tariffed supply, which tightens the overall market. Luna: And wheat and corn are both surging — wheat up eight percent in a week, corn up seven. That's partly weather, but could the Brazil tariff be spilling into grains too? Lucas: It could. Brazil is a massive soybean exporter, but the tariff is 25 percent on most goods. If China or other buyers worry about supply disruption from Brazil, they might start booking more U.S. grain. That pushes up CBOT futures. But the bigger driver for grains this week is the heatwave in the Midwest — we're seeing crop condition ratings drop. The tariff might add a few cents, but the main story there is weather. Luna: And energy is quiet by comparison — crude around seventy-nine seventy-two, Brent eighty-four eighty-three, both up about two percent in a week. No big tariff reaction there. Lucas: Right. Brazil is not a major crude exporter to the U.S. — we get most of our heavy crude from Canada, Mexico, Saudi Arabia. So the tariff doesn't directly hit oil flows. But there's a secondary effect: if the tariff slows Brazilian economic growth, that could reduce global oil demand slightly. But that's a longer, weaker chain. Luna: Let's talk about the mechanics for a second. The tariff was announced overnight. How are physical traders actually adjusting this morning? Lucas: Fast. Aluminum importers who have Brazilian metal on the water are scrambling to see if it was loaded before the tariff deadline. Customs typically uses the date of loading, not arrival, but there's ambiguity. Some traders are already offering Brazilian-origin aluminum at a discount in the global market, trying to divert it to Europe or Asia, while simultaneously buying Canadian or Middle Eastern metal for U.S. delivery. That arbitrage is happening in real time. Luna: So the tariff creates a two-tier market — one price for metal that can enter the U.S. duty-free, another for everything else. Lucas: Exactly. And because Brazil is a big supplier of value-added aluminum products — like extrusions and sheet — U.S. manufacturers who rely on those semi-finished goods are facing a sudden cost spike. The Midwest premium might rise five to ten cents a pound over the next few weeks if this tariff stays in place. That flows into construction costs, auto parts, beverage cans. Luna: And speaking of staying in place — the headline says 'unfair trade practices.' Is this a negotiating tactic that gets reversed? Or is this a long-term shift? Lucas: It depends on how Brazil responds. If Brazil retaliates with tariffs on U.S. goods — say, ethanol, which Brazil imports from us — then this escalates. If Brazil negotiates and offers quotas or concessions, the tariff might be reduced or removed. But markets are pricing in a multi-month disruption. The CME aluminum contract for September delivery is already trading at a premium to the spot month. Luna: So contango in aluminum — that's the market saying, 'I'll pay more later because I expect supply to tighten.' Lucas: Right. And that pulls metal into storage, which tightens the physical market further. It's a self-reinforcing loop until new supply comes online or demand cracks. But demand right now is actually pretty solid — the ISM manufacturing index is still above fifty, and infrastructure spending is flowing. Luna: One thing I find interesting — this tariff comes the same week that TSMC reported a seventy-seven percent profit jump. Tech and metals are often in different conversations, but they both point to the same theme: the U.S. is trying to build domestic capacity in strategic industries. Lucas: That's a great connection. Whether it's semiconductors or aluminum, the policy direction is clear: reduce reliance on trading partners perceived as unfair. The tariff is one tool. And for metals specifically, it could accelerate the buildout of new U.S. smelting capacity. We haven't built a new primary aluminum smelter in decades, but with prices where they are and tariffs protecting margins, the economics are starting to pencil out. Luna: But isn't smelting incredibly energy-intensive? Especially with natural gas prices still relatively low at two eighty-eight per MMBtu, but volatile? Lucas: Yes. Power is about thirty percent of the cost of making aluminum. So any new smelter would need a long-term power purchase agreement, probably with a renewable source or a gas plant. The Pacific Northwest has cheap hydropower, but that's largely allocated. You'd likely see new capacity in the Southeast or Texas, paired with gas or solar. It's not a quick fix — you're talking three to five years of permitting and construction. Luna: So in the near term, higher import costs, higher Midwest premiums, and higher prices for anything made with aluminum. Lucas: That's the most likely path. And if you're a trader, the play is to be long the Midwest premium and short LME aluminum, or long CME aluminum futures versus short the global benchmark. The spread trade is the cleanest expression of the dislocation. Luna: Let me ask the question that's probably on listeners' minds: does any of this affect the typical grocery bill or gas pump? Lucas: Indirectly, yes. Aluminum is in food packaging, electronics, cars. The tariff will add a few cents to the cost of a car, a fraction of a cent to a can of soda. But the bigger inflationary impact is if this triggers a broader trade war. We saw that in 2018-19 — tariffs on steel and aluminum led to retaliation, and the net effect was higher costs for manufacturers and consumers. Luna: And speaking of manufacturing, one thing I want to highlight — you mentioned the ISM. The CPI data from June showed a slight cooldown: headline CPI dropped from 333.98 in May to 332.6. Core CPI was essentially flat. So inflation is easing, but tariffs could put upward pressure on goods prices again. Lucas: That's the tension right now. The Fed under Chairman Warsh is walking a tightrope — he said he meets 'often' with the Trump administration but defends independence. If tariffs start pushing up core goods inflation, the Fed might have to hold rates higher for longer. The market is pricing in roughly one cut by year-end, but that could be pushed out. Luna: It feels like every commodity story this summer loops back to policy. Whether it's Strait of Hormuz, Brazilian tariffs, or crop conditions — the market is reacting to governments as much as supply and demand. Lucas: That's the reality of a politicized commodity cycle. And for traders, that means paying as much attention to trade announcements and geopolitical headlines as to inventory reports. The aluminum market this morning is a perfect case study: a single policy statement rewrote the pricing landscape in hours. Luna: If walking through the economy with us has made something click — maybe it's the aluminum contango, or how tariffs flow through to the Midwest premium — a handful of listeners chip in monthly at buy me a coffee dot com slash fexingo. And that's literally what funds making this many of these shows. Lucas: Yeah, we keep it ad-free because of that. It's not a big thing — just a small group making it possible for us to do a deep dive every day. So if it's useful to you, that's where you can help. Luna: Alright, back to the metals. Lucas, you mentioned the contango in aluminum. How long do you expect that to persist? Lucas: At least until the tariff situation clarifies. If Brazil negotiates a settlement within a month, the contango could collapse quickly. But if the tariff stays indefinitely, we could see a structural shift in the aluminum forward curve — higher premiums, more storage demand, and eventually new supply. I'd watch the weekly inventory data from the CME and LME. If exchange stocks start rising, that confirms the contango is incentivizing storage. Luna: And on the copper side — any risk that the tariff contagion spreads? For example, if the U.S. targets Chile or Peru next? Lucas: It's always a risk, but Chile and Peru are not currently in the administration's crosshairs. The Brazil tariff seems to be about specific trade practices in agriculture and intellectual property, not a broad metals policy. Copper is benefiting from the reshoring narrative, but it's not directly tariff-threatened. That said, if negotiations with Brazil get nasty, retaliatory tariffs could hit U.S. copper exports to Brazil — but that's a small market. Luna: Last thing — we saw SK Hynix shares plunge eleven percent on a tech rout, while Alibaba and Baidu jumped on an Apple AI partnership. That doesn't touch metals directly, but it shows how quickly capital rotates between sectors. Is any of that spilling into commodities? Lucas: Not directly, but it's a reminder that sentiment in equity markets can affect commodity demand expectations. If tech stocks plunge on chip concerns, that could signal weaker demand for electronics, which would hit copper and aluminum demand for wiring and casings. But today, the tech moves are company-specific — TSMC beat, SK Hynix missed — so the net effect is mixed. The base metal market is more focused on the tariff and physical fundamentals. Luna: So the core trade for today: watch the Midwest aluminum premium, watch the cme lme spread, and keep an eye on Brazil's response. Lucas: Exactly. And if you're trading it, size small and stay nimble. Policy can reverse faster than a supply-demand imbalance. We'll be tracking this all week.