NEWS & INSIGHTS
American Steel Stocks Plummet
What do Tariffs mean to the American Steel Industry After A Year of Imposition?
According to US President Donald Trump, the steel industry of America became the topic for a conversation all around the world when he imposed tariffs. He further added that the industry was provided with a new life and worked hard.
Had the tariffs worked according to the President’s plan, the American steel industry would have surpassed other industries. Since the day of the declaration of tariffs, the stock prices of steel have plunged 22% whilst the S&P index has plummeted only 3%.
Trump’s tariffs have harmed the industry instead of aiding it. The reasons mentioned below will help in understanding this.
Even after the imposition of tariffs, the steel stocks experienced broad market performance for the first half of 2018. Later, when the S&P index kept augmenting the steel stock took two leaps in June and August, ahead of re-tracking the market.
The question arises: what could have happened in mid-June and early August that led to such an enormous decline of steel stocks?
Prior to each drop, the President disclosed the lists of imports counterbalanced by shares of his first $50bn in China tariffs. As 95% of these imports were intermediary goods bought by American firms, the markets expected that the tariffs would harm their sales, decrease their output, and raise their prices. Consecutively, tariffs would drive down their buying of domestic inputs, such as steel.
How Do Economists Perceive It?
The economists condemned the tariffs as terrible for the American economy, manufacturers, and consumers. At the end of the day, the higher prices of steel would be put across consumers, whether the steel was for a can of soda or for a skyscraper. In addition, they say that one of the best methods tHowever, in spite of the 25% tariff imposed by Trump on imported steel, the industry is not struggling. The prices of steel have dropped to the same amount as they were prior to tariffs. Furthermore, employment is inactive. Nonetheless, it seems that the tariffs are not working due to the stock market.
o fail a booming economy is to make steel more costly.
The opinion of the Leaders of the American Steel Industry
In contrast to the economists’ opinions, the leaders of the American steel industry praised the President’s move. They claimed that the action was delayed and prominent to create an equal opportunity against foreign producers whose steel was being subsidised unlawfully by the governments in its nations of origin.
How Can Tariffs Benefit The American Steelmakers?
One way to resolve how tariffs influence the steel industry is by looking at the gross profit margin that determines the raw profitability of manufacturing. The percentage change in the gross profit margin of enormous American steelmakers – Steel Dynamics, AK Steel, U.S. Steel, and Nucor has risen steeply since July 2018. The tariffs led to these large gains in gross margin.
The aim of the tariffs on steel is to diminish its import in the American market so that the steelmakers based in America manufacture and sell more steel. As a result, the steel industry of the US produced about 6 million tons more steel in 2018 as compared to the year before, aiding steel mills to operate at their highest productivity rate in a decade. Eventually, the combination of high prices and 6 million tons of additional steel proved extremely beneficial.
The Pessimistic Market
When one looks at the stock prices, they would not believe that the US steel industry experienced its best year in 10 years. It looks like the investors were pessimistic about gaining high profits for the steel industry after the tariffs came into effect. For example, Ford informed that the higher costs of commodity, mainly aluminium and steel prices, cost it $439 million last quarter itself.
The investors are not worried about the impact of tariffs on steel consumers and users, there are other industries subjected to the same fate, for example, retaliatory tariffs. Brown Forman is an instance for these tariffs.
The Bottom Line
The tariffs implemented on steel are unlikely to prove it as durable. Therefore, it is not the right time to make an investment in steel stocks now. However, the investors who purchase the best steelmakers, Steel Dynamics, and Nucor, should excel, only if they plan to buy for the long term.