As widely expected, President Donald Trump signed orders imposing steep tariffs on steel and aluminum imports from certain countries yesterday, defying a wave of criticism and threats of counter-measures from major foreign trade partners.
The President’s move is aimed at protecting the domestic steel and aluminum industries which had long been reeling under the onslaught of cheap imports and has suffered significant reduction in production and employment.
In line with last week’s announcement, the White House has pushed ahead with a 25% tariff on steel imports and 10% tariff on aluminum imports. The tariffs, which President Trump believes are necessary to protect the national security, will go into effect in 15 days.
The tariffs are the result of the U.S. Department of Commerce’s investigations, which were carried out under Section 232 of the Trade Expansion Act of 1962, to determine whether the imports pose a threat to national security. The Trump administration ordered the investigation last year.
Trump Exempts Canada & Mexico
President Trump excluded Canada and Mexico — two major sources of steel imports to the United States — from the tariff orders that he signed in presence of steel and aluminum workers. Moreover, there will be provisions for other countries to apply for exemptions should their imports do not hurt the U.S. economy.
The President noted that Canada and Mexico represent “a special case” and will continue talks with them to address concerns. The exemption of these nations marks a significant concession from the President’s initial plan for broad-based tariffs on steel and aluminum. The exclusions of these countries are dependent on the outcome of the North American Free Trade Agreement (NAFTA) renegotiation talks that are underway.
Canada is the largest steel exporter to the United States, accounting for roughly 16% of total U.S. steel imports in 2017, per the U.S. Census Bureau data. Mexico is the fourth-largest exporter of the metal with around 9% market share.
The markets cheered the move with three major U.S. stock indexes closing higher yesterday on the news of exemptions that somewhat eased concerns of a fierce trade war.
Steel Stocks Retreat
Steel stocks rallied following the tariff announcement last week on expectations of a broad-based trade action. However, the Trump tariff order sent stocks of major U.S. steel makers tumbling yesterday.
Shares of U.S. Steel Corp. (X - Free Report) , Nucor Corp. (NUE - Free Report) , AK Steel Holding Corp. (AKS - Free Report) , Steel Dynamics, Inc. (STLD - Free Report) and Commercial Metals Company (CMC - Free Report) tanked roughly 2.9%, 2.7%, 4%, 2.8% and 3.6%, respectively, yesterday.
The price reaction appears to have been triggered by the concessions made by the President in the tariff order by excluding two main sources of U.S. imports while leaving room for other nations to negotiate exclusions from the tariffs.
Nevertheless, the tariffs would give American steel makers more pricing power and also help to level the playing field. The tariffs will lead to lower imports into the United States, which would in turn boost demand for American steel.
On prospects of higher steel demand as a result of the latest U.S. punitive trade measures, U.S. Steel said recently that it will restart one of its Granite City Works blast furnaces and steelmaking facilities. U.S. Steel expects to call back around 500 employees starting this month. Both the blast furnaces of Granite City Works and its steelmaking facilities were idled in December 2015 in response to challenging market conditions, including unfairly traded imports.
Moreover, the tariffs are expected to boost domestic steel production capacity. The U.S. Department of Commerce earlier said that the trade actions are aimed at increasing domestic steel production to roughly 80% operating rate from its present 73% of capacity.
Both U.S. Steel and Steel Dynamics sport a Zacks Rank #1 (Strong Buy). While Nucor carries a Zacks Rank #2 (Buy), both AK Steel and Commercial Metals currently have a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Worries for Industry Groups
Some industry groups have expressed their discontent about the trade tariff action, worrying that it would drive up manufacturing costs, increase prices for consumers and may also lead to job losses. Fears of higher steel prices resulting from the levy of tariffs hit the stocks of a host of industrial companies following the tariff announcements including Caterpillar Inc. (CAT - Free Report) and The Boeing Company (BA - Free Report) that are major consumers of steel.
The automotive industry, which consumes a big chunk of steel, is among the industries that will be hit the hardest. U.S. automakers fear about the higher costs they have to bear for steel, a key raw material, which would eventually result in higher cost for consumers.
The tariffs also pose a headwind for the U.S. chemical industry. The move is expected to hurt new chemical investments in the United States and may lead to a slowdown in growth in the domestic chemical industry. These costly tariffs are likely to push up the costs of building chemical plants that use a significant amount of steel.
Risks of Tit-for-Tat Trade Retaliation
Concerns over an international trade war gripped the markets since the declaration of the metal tariffs last Thursday, further exacerbated by the resignation of White House chief economic advisor, Gary Cohn on Tuesday. The tariff announcement stoked fears of an intense trade war and sparked selloff on Wall Street on Mar 1.
The U.S. trade measures now risk retaliatory actions on American exports, hurting the U.S. economy. Since its announcement on Mar 1, metal tariffs have drawn criticism from major U.S. trading partners and some members of the Republican Party.
U.S. Republican Senator Jeff Flake said, in a statement, that the “so-called 'flexible tariffs' are a marriage of two lethal poisons to economic growth — protectionism and uncertainty.”
Moreover, the European Union (EU) has reportedly threatened to impose tariffs on Harley-Davidson motorcycles and other iconic U.S. brands in retaliation for the Trump administration’s tariff move. Cecilia Malmstrom, the EU Trade Commissioner, tweeted "The EU is a close ally of the US and we continue to be of the view that the EU should be excluded from these measures."
China has also warned that it is ready to take an "appropriate and necessary response" in any trade war with the United States. While China only accounts for 2% of U.S. steel imports, it is the world’s biggest producer of steel accounting for around half of the global production. Beijing has been repeatedly accused of dumping excess steel capacity into global markets.
Brazil, which is the second-largest exporter of steel to the United States with roughly 13% share of total imports last year, has also pledged to take “all necessary actions” to protect its interests.
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