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USMCA to Take US Steelmakers to Newer Highs

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On Sep 30, the United States, Canada and Mexico inked a deal that replaced the 25-year old North American Free Trade Agreement (NAFTA). U.S. Trade Representative Robert Lighthizer and Canada’s foreign affairs minister Chrystia Freeland jointly stated that the landmark deal would result in robust economic growth in the three countries.

Known as the United States-Mexico-Canada Agreement or USMCA, the deal is slated to bolster gains for American steelmakers. The terms of the deal would result in greater usage of domestic steel for industrial production within the region. Investors must cash in on such an opportunity and invest in steel stocks for alluring returns.

Terms of the Agreement

Hours before the midnight deadline on Sep 30, Canada’s Trudeau administration agreed to sign the USMCA. This comes after over a year of tense negotiations between the United States and Canada. The agreement would allow farmers in the United States to have wider access to the Canadian dairy market. This means that American farmers will have an access to approximately 3.5% of the Canadian dairy market.

Further, Canada has also agreed to limit its auto exports to the United States to 2.6 million vehicles. Such an arrangement allows Canada to avoid a 25% tariff on automobile imports that the Trump administration is largely expected to impose.

The deal also states that an automaker can also avoid import duties imposed by the United States on any of its automobiles if about 75% of its total production takes place within North America.

Steelmakers to Gain

Not only do dairy farmers, ranchers and auto-makers benefit from such an agreement, steelmakers are also poised to make big bucks. This stems from the fact that the deal now ensures that steel from North America would be used to make cars in the region.

Further, the U.S. Trade Representative's office stated that USMCA would include rules specific to passenger vehicles, light trucks and auto parts. These new rules of origin would provide the necessary impetus to source raw materials such as steel from the United States and the rest of North America.

Apart from the clause that requires 75% of the production to take place within North America, about 40-45% of the parts would be made by workers, who earn a minimum of $16 per hour. This ensures that wages earned by those working in the steel sector would witness a hike.

How Well Are Domestic Steelmakers Positioned?

The steel industry has been in good shape lately, thanks to favorable demand and pricing fundamentals for steel. This can be attributed to the impact of broad-based tariffs which the Trump administration imposed on imported steel under Section 232 of the Trade Expansion Act of 1962. The tariffs are boosting production capacity of domestic steel makers amid lower imports.

Moreover, these tariffs have provided the much-needed protection to American steel producers and instilled optimism in the domestic steel industry which had long been reeling under the onslaught of cheap imports.

Per the latest AISI report for the week ended Sep 29, U.S. raw steel production was 1,856,000 net tons. The reported weekly production also represents an 8.5% year over year jump. The gains came on the back of improved capacity utilization, which was 79.2%. Adjusted year-to-date production through Sep 29 was 70,469,000 net tons, up 4.5% from 67,425,000 net tons recorded in the same period a year ago.

Shares of domestic steelmakers such as Universal Stainless & Alloy Products, Inc. (USAP - Free Report) , AK Steel Holding Corporation (AKS - Free Report) and Nucor Corporation (NUE - Free Report) have gained 7.7%, 10% and 3.8%, respectively in the last three months. All the three companies carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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