Insignificant impact on Boeing from aluminum tariff: JP Morgan

March 2, 2018, © Leeham Co.: President Trump this week announced tariffs of 25% and 10% on steel and aluminum imports, sparking a sharp stock sell-off and provoking fears of a trade war.

Ever parochial in its coverage, LNC asked Boeing what the impact will be. A spokesman said the company is still assessing the impact.

But the aerospace analyst for JP Morgan today said it should be very little.

Negative but not significant

“Because aluminum and (to a lesser degree) steel are inputs for building aircraft, President Trump’s announcement yesterday that he plans to impose tariffs on imports of both metals – of 10% and 25%, respectively – is a negative for US aerospace manufacturers,” JP Morgan wrote. “The impact should be small, however, as…aluminum prices increased by more than 30% last year (significantly more than the proposed tariff), with little to no discernible effect on Boeing and most major suppliers.”

The analyst, Seth Seifman, noted that customers “ultimately” absorb price increases.

“If we assume that aluminum accounts for 70% of the weight of a 777 or 737 (it is far lower on a 787) and that materials account for 30% of the price of an aircraft, then a 10% increase in aluminum is a less than 2% increase in the price of more metal-intensive aircraft,” Seifman wrote. “Steel is such a small component of aircraft that the tariff impact should be negligible. Boeing will have to consider these higher costs in pricing future aircraft deals, but lots of cost and price variables move around all the time, and so a low-single-digit change does not seem like a showstopper.”


53 Comments on “Insignificant impact on Boeing from aluminum tariff: JP Morgan

  1. It could have a bigger impact on the construction costs of assembly plants such as envisaged at the Mobile extensions, etc. The motor vehicle industry could feel the effects even more, workers needs those to get to work, inflation pressure?

  2. How much of a knock-on effect will this have on Al supplies to Europe, and hence Airbus?

    • nyx – If U.S. Al import demand is reduced, raw-materials suppliers are free to adjust prices to stimulate greater demand in other markets, yes? Or is the question rather how tariffs might influence price relativity for U.S.-assembled Airbus airframes..?

      • Yes, I was looking at Al supplies to European markets.

        But you make another interesting point. US assembled A320 frames are prefabricated in Europe and so could see a (small?) rise in cost advantage vs. the 737 production impacted by the US Al tariffs.

        • nyx – Always supposing, of course, a relationship between cost and price (not to mention value and worth), which might be a touch naive…

  3. I wonder how many Americans remember that back in halcyon days of the twenties (1820s, that is)’ when the federal government was much, much smaller, the feds essentially lived on tariff revenue and grew its national industries on same. Ah, the good, old days!

    • Which industries were growing in the 1820s? Was it cotton and slave trade? Tobacco? Those “good, old days”?

  4. The issue isn’t price increases on aluminum, rather will someone (China) decide to retaliate by canceling orders

    • Good point! China is “scheduled” to take delivery 1 of every 3 737 Max produced in 2018. Maybe not canceling but major delay (years) in taking an new 737 Max aircraft. The Chinese are not going to tax themselves with import tariifs and raise the price of aircraft to their airlines
      By the way, have you looked at the recent success record of Trump’s 80 year old billionaire Commerce Secretary? Didn’t he just lose the C Series tariff of 292% by US ITC! Wilbur Ross is take a knife to a gunfight with China!

    • If China had placed their order after a 30% increase in the Al price, don’t expect a 10% increase in Al to have any impact on China’s decision to complete their order.

      • Depending on contract wording China can probably sit pretty.
        Al duties are on Boeing. China has their pricing negotiations fixed.

  5. If this is the quality of reporting on financial issues JPM is in trouble: Boeing crashed in the stock market not because of the trivial impact of aluminum cost increase but because of the much more likely impact of tariffs on its products in response to the Trump tariffs. These are invariably chosen to maximize pressure on politicians – which in the US case normally means carefully selected ones on agricultural products (as China has already done in response to the Trump tariffs on washing machines) or on the products of major US corporations – and most especially Boeing in view of its seeming links with White House (fairly or not).

  6. Increasing tariffs on any material or product is a good thing. Why? Long term, they help stimulate the development of new technology and advanced materials (e.g., composites and super alloys) to offset cost increases due to these tariffs.

    In this case, Boeing will simply push harder for the use these materials which now represent over 12% for the B777 and 50% for the B787. Other aircraft manufacturers will probably do the same.

    For a better look at the impact of the tariff increases, shall we fly a little higher? This particular presentation should stimulate additional thoughts:

    • For the US and heavy industry tariffs effected local industry to take the windfall profits and fall further back over time ( the initial reason why they were not competitive). Next step then is government money to “protect jobs”. recent example the auto industry.

      • Amusing. It’s quite odd that the UMD engineers behind this high-tech wood are Chinese – and those supporting the technology. Can’t wait to see COMAC use this material and promote it on each of their C919 aircraft with a sign that says: “Made with Wood.” Howard Hughes (RIP) would be proud of them.

          • Great info. Always great to see companies pushing their limits. Wondering though, if the CR929 composite panel uses “wood.”

        • The Mosquito was made mainly of wood and pretty compretetive with alu fighters back then.
          One can wonder if special wood/carbon compisites can be competetive for certian areas in the future.
          Lots of the DC-8 interior was made of wood.

          • As you know, any “composite” material is acceptable (including wood), provided its mechanical properties satisfy engineering analyses (e.g., stress, F&DT, etc.). As a minimum, low-performance materials can always be used for secondary structure.

          • The Mosquito was effective because it was invisible to radar (those pesky metal engines and guns/ammo aside).

            It actually was not a true fighter, Fighter Bomber, light bomber, reconnaissance , night fighter.

            The P-38 (flown right) was about the only twin fighter of WWII.

            P-61 (Black Widow) was very good as well, though it was a night fighter.

          • I think this Mosquito chat is getting away from the point (new materials technology) but TransWorld, it was not “invisible to radar” and this would not have been its advantage anyway. It was successful because it could fly very high or low, was fast enough to outrun many opponents, was agile, aerodynamically and structurally economical and easy to repair in situ. Plus the material meant huge numbers could easily and quickly be built.

            Back to the new engineered wood, absent restrictions on Al supply, what stands out to me is the claimed economics on weight and manufacturing cost coupled with the huge scale advantage it (like 3D printing) could enjoy compared with niche, highly specific supply chains and processes. Plus any potential tax advantage due to CO2 offset etc.. Clearly it needs to be rigorously validated, suitable coatings developed etc given moisture instability, and for aerospace go through plenty of red tape, so nothing major likely soon (and possibly ever). But it does sound like a potential step change and highlights what potential there is for new materials technology and how tariff imposition may improve the chances of new materials/processes.

      • Japan.
        We’ve looked at collapsed wood for structure ( buildings ) in the 80ties. Essentially what you do is remove the air from wood. from cellulose fibers bonded by lignite in a porous matrix you turn it into a pure cellulose fiber lignite bonded “composite”. weight per volume increases quite a bit.

        • Yep, the possibilities are endless. PS: If it weren’t for Airbus, Boeing wouldn’t be using as much composites or super alloys on their aircraft at this time.

          • Houses are still built of wood and its one of the most resilient structures in Quakes (ours survived the 64 Quake with zero damage.)

  7. Once again, a narrow vision from a narrow-minded specialist. Boeing is absolutely not fired from this trade war in sight. Since it represents the model enterprise of Trumpism, nothing prevents China, Europe or Canada from taxing Boeing’s products and services. Imagine for one second the impact in the media!

    • Actually, JP Morgan addressed the China end. Because the airlines there are buying so many airplanes from Boeing (representing about 20% of Boeing’s backlog), and it’s not feasible to turn to Airbus because of its backlog, he doesn’t think Boeing would be a target of any retaliation. He didn’t specially address Europe and Canada.

      • China could conceivably cancel Boeing wide-bodies. For the next 10 -20 years, the Chinese would probably be content with just ordering the A330neo, A350, A380 and CR929.

        “Air China, China Eastern Airlines and China Southern Airlines still have a large number of B777-300ER aircraft orders not delivered yet. They are expected to start ordering B777X in the next five years,” said Darren Hulst, managing director of marketing at Boeing Commercial Airplanes Northeast Asia.

        • If China cancels 777’s and orders A350-1000 and especially the highly political A380’s it will get Washingtons attention. Steel tarrifs have been popular in Washington historically. EU will not smile when the China surplus steel comes to the EU.
          The EU can respond with a tarriff on single crystal turbine blades of the same total amount that EU steel suppliers will pay to the US making room for 3 EU factories making single crystal turbine blades (one each in Germany, France and the UK) for engines produced there.

          • We have to assume in that case anything short of Tactical nuke can get the mans attention.

      • Thank you Scott for that clarification. There is a difference between reality and political intention. The announcement of a single threat to a Tax-Boeing and you get another explosive political reality with its lot of negative consequences. What would be Boeing’s reaction? From the American political class ? Ouch …

      • slack that could be taken up by local produce: COMAC.
        Not fast but it would push things there.

      • Not sure about your assessment . With the imminent flight testing of the MC-21, China will have access to an alternative to the B737 from a friendly country.
        The C919 will also get a hands-up (albeit) with a backlog and long manufacturing process lead. Bombardier May also gain traction.
        Even the Antanovs can become pretty if you want to shaft Trump.

  8. Textiles and guns, heavily in New England. Shipbuilding and ship repair also. Lots of timbering and artisanal crafts. Ag, of course. Canals and turnpikes to open up the Midwest. Steamboats. Finally, chew on this: “Tariffs were the main source of (US) federal income from 1789 to 1914.” (From Wikipedia) No federal income tax!

  9. Is anyone actually dumping aluminium?As I understand it,the vast majority of the cost of production is energy. So either you have a lot low cost energy like Iceland (aluminium plants are more often than not sited next to a hydroelectric plant)or you are generously subsidising US manufacturing industry. Far more profit and jobs futher down the line.

    • In the majority of US tariff cases it is either run down infrastructure ( Al, Steel ) or lack of innovation ( like the chickentax on efficient minivans ) that forced external supply.

      Typical for the US is to prefer continuous higher cost over up front investment for something more efficient. look at housing!
      Before any investment is done leaning on the workforce is a must.

      • Too true.

        When I luved in the US some time ago, my neighbour worked at a paper company (US owned). They would not make any investment that would not pay itself back within a year, or three in rare cases.

        In contrast, European paper mills would invest if it payed back within ten years, sometimes even 20 years.

        Guess whose mill was more efficient? Which was could not compete eventually?

      • You’re “off base” on this. One (US) word: Nucor.

        • As in “NUCOR corporation” that specializes
          in electric arc furnaces loaded with scrap to produce higher quality steels ?
          I don’t see your point then.

  10. Much of the aluminum Boeing buys comes via Wichita, and I think they have a fresh long term contract per frame for that.

    • which is moot.
      price is ex source.
      tariff is added on crossing the border.

      • How much processing is required to make aluminium qualify as another product?Won’t make that much difference for Boeing but the answer is obvious for frying pan purveyors.

    • Has Trump got a point?Looking at those numbers ,its quite disturbing to see how much the West relies on China and Russia. Aluminium is a strategic metal and was in desperately short supply in the UK during world war two and many people don’t realise that explosives were a bigger problem than aircraft production. The tariff is not well designed to deal with the problem though , as it will have massive negative effect on the allies of the US and hardly any effect on more unreliable nations. There must be a better way.

    • @Anton,that just comes up with one page of Wikipedia. Quite interesting but hardly lengthy!

  11. Its not the fact that there is issues and action is taken.

    Its the random childish impulses that are involved that rattles markets.

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