The United States is set to impose a substantial 25% tariff on all steel and aluminum products imported from every country around the globeThis decision stems from complex trade dynamics and previous agreements with nations such as Canada, Mexico, the European Union, Japan, South Korea, and Brazil, which comprise about 25% of the U.S. steel supply, with roughly 80% of that currently enjoying tariff exemptionsMitsubishi UFJ Financial Group (MUFG) highlights that such tariffs will escalate import expenses by approximately $150 per ton, pushing the import parity for hot-rolled coils (HRC) to between $800 and $900 per ton, up from a current price of $755 per ton.

In the aluminum sector, the situation is quite peculiar, as roughly 70% of supplies are imported, with about 60% of the duty-free segment coming from CanadaAccording to MUFG, if the 25% tariff takes effect, there could be an increase in the Midwest premium from the current 30 cents per pound to between 40 and 45 cents per pound, excluding transportation and other factorsOverall, while MUFG’s commodity outlook for 2025 suggests only moderate prices for index investments, the potential policy shifts heighten the necessity for diversification in commodity investments moving forward.

The announcement on February 9 to levy these tariffs was framed under the auspices of safeguarding American manufacturing and was intended to be applicable to all imported products on February 10. Although the effective start date remains uncertain, the intent of the new administration is clear: They aim for these tariffs to affect imports from all nations.

The U.S. steel industry, alongside its global counterparts, has been profoundly affected by a rise in trade protectionism over recent yearsBack in 2018, the U.S. implemented similar tariffs of 25% on nearly all imported steel under Section 232. Despite the persistence of these tariffs, it's noteworthy that the majority of imported steel into the U.S. managed to bypass these charges

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As of 2023, only around 15% of imported steel incurs the S232 duties, a significant decline from the 50% share prior to the imposition of these tariffsNotably, the U.S. government had earlier exempted steel from Canada and Mexico, which represented about 40% of total U.S. steel imports, from these tariffs.

Within this context, a tariff-rate quota (TRQ) system applied to a specific quantity of imported goods also allows for some duty-free accessToday, U.S. imports still account for about 25% of the steel supply, with around 80% exempt from tariffs as per agreements with Canada, Mexico, the European Union, Japan, South Korea, Brazil, and othersMUFG reinforces that the newfound tariffs will markedly increase import costs by about $150 per ton, mandating an import parity for HRC to fall within the $800 to $900 range, a notable rise from its current standing price of around $755 per ton.

The adjustment of steel and aluminum tariffs in the U.S. is under the spotlight, not least because of the distinctive structure of aluminum supplyAs mentioned earlier, 70% of aluminum is imported, with a significant portion of that supply being exempt from tariffs due to its Canadian originAccording to the assessments from MUFG, if a uniform 25% tariff is imposed, the Midwest premium would likely escalate significantly from its current level to potentially between 40 and 45 cents per poundHowever, in the short term, the diminishment of newly built inventories could act as a buffer, though the rapid consumption of these stocks makes long-term sustainability questionableMUFG is thus inclined to predict that under a full implementation of the tariffs, the Midwest premium will likely trend towards 40 to 45 cents per pound, which will inevitably alter the cost structure and market dynamics within the U.S. aluminum-related industryFrom increased costs for aluminum production companies to potential fluctuations in terminal consumer market prices, this movement warrants ongoing scrutiny from various stakeholders.

Amidst these shifting fundamentals, MUFG has suggested a selective investment strategy in commodities for the year 2025:

For energy, the outlook ranges from neutral to bullish

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The ongoing surplus and high capacity may exert pressure on oil prices; however, tariffs induced by the U.S. as well as geopolitical uncertainties present tangible risks of potential price spikes in the $65 to $80 per barrel territoryAs for natural gas, delays in U.S. liquefied natural gas supply projects have led MUFG to revise its expectations for declining U.S./EU gas prices to 2026.

Regarding base metals, their outlook remains neutral to bullishThey are expected to remain range-bound in the short term due to tariff-related risk premiums, though bullish sentiments driven by Chinese economic stimulus and structural green transition demands loom on the horizon.

The outlook for precious metals, on the other hand, is explicitly bullishThe unyielding bull market for gold continues to reinforce MUFG's conviction for a second consecutive year, benefiting from "fear" as a haven against geopolitical instability and "wealth" driven by burgeoning demands from central banks in emerging markets.

Finally, when it comes to agricultural commodities, the outlook is neutralFactors such as U.S. trade and foreign policies, evolving geopolitical landscapes, and the unpredictable La Niña phenomenon are amplifying volatility, yet the low stocks are serving to cap the risk of price declines.

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