Coca-Cola's Senator vs. Metal Prices
Copper and zinc might be tumbling, but in the US, metal groups are drinking down profits thanks to Trump’s trade tariffs. “I said, ‘God, please let this be good water,’ and it was great.”
Johnny Isakson has the closest thing to a lifetime seat in the US Senate: he first stood for federal elections in 1974 and was once re-elected with 80 per cent of the vote.
But Isakson's also known as the senator for Coca-Cola. In Georgia, which he represents, the company has two bottlers, 22 factories, its global headquarters and nearly 10,000 employees. It is where two major railroads and three interstate highways all converge, linking ports on the Atlantic to factories in the Midwest.
Coke donates to Isakson's campaigns, and its PR execs drop in products on his chief-of-staff. Isakson, in turn, is an outspoken proponent of American aid in Africa, one of Coke's key growth markets, and took a trip to Ghana in 2011 to meet with the president. Afterwards, he ate a pineapple grown by a Coke subsidiary and drank down a glass of murky water in front of cameras and a village chief. “I said, ‘God, please let this be good water,’ and it was great... We should all be praising the good things that corporations are doing.”
And yet one thing's been bothering Isakson for a few months now: the rising price of metal. His office has repeatedly written to Donald Trump's Commerce Secretary, Wilbur Ross, asking for exemptions to tariffs introduced by the White House on steel and aluminium. Hiking the price of imports will “hurt Georgia” and “slam the brakes” on US manufacturing, Isakson says.
Any concern is understandable. Coke sells 1.9 billion drinks around the world every day, aluminium is one of its biggest input costs, alongside sugar, and the cost of getting a tonne of metal through US ports has risen from $2,150 to over $2,500 since Trump starting firing-off sanctions and tariffs against America's trading enemies,
thwacking everything from the Turkish lira to Russian aluminium groups.
Where is that money going? Who earns profit on the metal in a can of Coke, and how is that profit shifting?
Coca-Cola and its bottlers buy their cans off packaging companies, including Ball Corp, which can turn a sheet of aluminium into drinks at a speed of 1,800 cans per minute. Hedging covers Ball against short-term moves, and it has halved the amount of metal it uses per can since the 1970s by making them ever-thinner. But margins are tiny and aluminium is its biggest expense, leaving little room for error.
Then there's traders and importers, who earn a few basis points on each transaction, or rollers, such as Georgia-based Novelis, which presses recycled cans and new metal ingots into supermarket-ready sheets just 0.1mm thick. Profits are just as marginal.
That leaves aluminium producers drinking from the soda fountain directly. America's biggest, Alcoa, recently reported a 25 per cent jump in quarterly revenue to $3.58bn, nearly doubling earnings to $904m. Tariffs have inflated the cost of imports and until US production increases, Alcoa is selling at inflated prices. It is trying to downplay the benefits, saying the whole market has been hit by “disruptions”. But Bob Casey, the senator for Pennsylvania, where Alcoa is headquartered, happens to be a strong tariff supporter.
There is also Chicago-based Century Aluminum, which is firing-up idled smelters. It is “deep in the rebuild process”, says chief executive Mike Bless.
The other big player in US aluminium is Rio Tinto. Its huge smelters in Quebec are on the wrong side of Trump's tariffs, but the company is still cashing-in on market tightness: Rio's average aluminium prices
have risen 18 per cent in the last twelve months, adding $557m to half-year earnings of $9.2bn.
How long it all goes on for is anybody's guess. Companies are “pretty wary” of making major investment decisions based on US policies that change so quickly, one analyst says. “Canada's exempt [from the tariffs] one day, not the next.”
“Winding up the way back machine,” Century's Mike Bless says, “six months ago alumina was trading in the low to mid three hundreds.” Then it spiked to over $700. Looking forward at any date, “a lot's going to happen between now and then.”
In the meantime, aluminium groups are jostling for the profits. Century is looking at acquisitions in alumina and bauxite, to go higher in the supply chain, whilst Rio Tinto's chief executive Jean-Sebastien Jacques has made at least five trips to North America this year. He visited the White House in February, announced a partnership with Alcoa in May and opened a new office with 70 staff on Century's doorstep in Chicago in July. Rio wants to be “option-rich, option-ready” in several different commodities, Jacques has said. “We never stop investing.”
Coca-Cola may have also found a way to live with higher prices. It is passing them onto consumers, the company announced during its latest set of results, alongside a $900m jump in profits. Even Isakson is making adjustments: Trump's approach to trade is “not a bad strategy if it works.”
“I know who I speak for,” he said at a recent hearing on metal prices, “which is the voters of the state of Georgia.”
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