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Steel ETF to Gain as US Expands Steel and Aluminum Tariffs

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The Trump administration has expanded tariffs on imports of steel and aluminum derivatives including steel nails, tacks, drawing pins, corrugated nails and staples, aluminum stranded wire, cables and plaited bands, and bumper and body stampings of aluminum and steel for motor vehicles and tractors.  Additional duties of 10% for aluminum derivatives and 25% for steel derivatives will be imposed from Feb 8. However, Trump excluded certain countries like Argentina, Australia, Brazil, Canada, Mexico and South Korea from the additional tariffs on steel derivatives, and Argentina, Australia, Canada and Mexico from the extra duties on aluminum products.

In 2018, 25% tariff was imposed on foreign steel and 10% tariffs on foreign aluminum under section 232 of the Trade Expansion Act of 1962 pertaining to national security. The Trump administration said that a healthy domestic iron and steel manufacturing capacity was necessary for national defense. The reason behind the latest expansion of tariffs is to prevent some foreign companies from “circumventing” the previous hikes due to which imports of steel and aluminum derivatives had “significantly increased.” In fact, there was a 33% year-over-year rise in the steel nails and staples imports from June 2018 to May 2019 along with a 152% rise in aluminum wire and cable imports in the same period.

According to American Iron and Steel Institute, the steel plants in the United States were operated at 82.7% of the capacity in the week of Jan 18 compared with 80.4% in the year-ago period.

Moreover, United States Steel invested $978 million in its facilities during the first nine months of 2019, reflecting more than 50% increase from the year-ago period. The data demonstrates that large steel companies raised their investments since the tariffs were placed.

However, economists and trade analysts do not seem to be surprised with the latest development. They earlier believed that steel prices in the United States were already high, and in such a situation imposition of tariffs on steel and aluminum imports would make it expensive and non-competitive to manufacture products like nail or car domestically. This will induce more companies to import such items. In this regard, a senior fellow at the Peterson Institute for International Economics, Chad Bown commented that “Trump’s steel and aluminum tariffs have raised the cost of key inputs, making American companies that rely on those metals less competitive worldwide. Now Trump is expanding his tariffs to shield their products from competition as well. Where will it end?”

ETF to Gain

The additional tariffs can provide more room for the domestic steel and aluminum players by making imports of products made from these metals expensive. Against this backdrop, investors can take a look at the following fund:

VanEck Vectors Steel ETF (SLX - Free Report)

The fund seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE Arca Steel Index, which aims at tracking the overall performance of companies involved in the steel sector. The fund has an AUM of $58.7 million and charges a fee of 56 basis points. It holds a basket of 26 holdings. The fund has lost 14% over the past year (read: Sector ETFs & Stocks to Gain/Lose on Coronavirus Outbreak).

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