US tariffs: Steel set for a bumpy ride
The bigger risk is industry-wide effects if other countries retaliate with their own tariffs, which then affects exports or results in a decline in prices
US President Donald Trump was true to his word and has imposed a 25% import tariff on steel and a 10% tariff on aluminium, with effect from 23 March.
The only concession the President has made is to exclude Mexico and Canada from these tariffs, subject to continuation of trade talks and with the expectation that they will prevent transhipment through their territory to the US.
The US government hopes to revive plants that may have been idled or shut, to increase the share of domestic production and create jobs.
The objective is that 80% of existing domestic capacity will be put to use, due to these tariffs. The report that the government used to base this decision says capacity utilization in steel was estimated at 72% in 2017 and for aluminium at 39%.
The presidential proclamation goes on to invite any country that believes it deserves an exemption to make a case for one.
Even with Mexico and Canada, the government wants to limit imports. The European Union and UK are already calling for an exemption though no formal talks have been held.
Rather than collectively take action to compel the US to remove these tariffs, countries or regional blocs are asking for an exemption for themselves. On Friday, a tweet from Trump indicated a deal with Australia was on the cards.
That these tariffs have been approved leads to an uncertain period ahead for India’s steel and aluminium producers. While there is a risk of retaliatory tariffs, there is also a risk of excess metal in the market, if exports to the US become unviable. Consequently, metal stocks had a terrible time on the domestic stock market last week.
Among companies, Tata Steel Ltd and Hindalco Industries Ltd have significant operations overseas. Tata Steel’s European steel operations are likely to feel the heat.
Even when the European business moves into a joint venture with Thyssenkrupp AG, the main region of operation will remain Europe.
Any significant downturn in steel demand or prices is a risk to be watched for. For steel, a bigger concern could be that prices of iron ore have declined in China last week on concerns that imports fell in February.
Hindalco’s subsidiary Novelis Inc. buys aluminium metal or scrap, which it then processes into rolled products to be used to make products such as beverage cans or products used in the automobile industry.
Since Canada’s steel and aluminium industry is exempted, the impact on Novelis is likely to be less than expected. When the company’s March quarter results are announced, investors will wait to hear management commentary on what impact the tariffs are having on its business.
In sum, Trump’s tariffs are here to stay and how other countries react to these tariffs will be a factor that will determine how prices behave.
Company-specific impact should become clear post-March quarter results. The bigger risk is industry-wide effects if other countries retaliate with their own tariffs, which then affects exports or results in a decline in prices.
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