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Few Worries Among Analysts Over Steel, Aluminum Tariffs

Brian Bernard, CFA, CPA
Richard Hilgert

Jeremy Glaser: The announcement of steel and aluminum tariffs has sent the market lower in recent days as investors have worried about the impact of higher input prices. We talked to several of our industrial analysts to see what the real impact would be on many of the firms they cover, from aerospace to automobiles.   

Chis Higgins: We don't expect a significant cost impact on the aerospace and defense industry from the recently announced tariffs on aluminum and steel that the Trump administration has unveiled. It you look at the weight of an aircraft, about 80% of it is aluminum, but that's only for older generation aircraft. For newer generation aircraft, it's closer to 20%. Overall, the cost of aluminum in the aircraft is no more than about 2 or 3%, and the industry has shown an ability to absorb aluminum price increases in the past. 

The real issue that we think that Boeing faces, and it's suppliers like Spirit AeroSystems, is that fact that China may retaliate against the U.S. Although we think this is very unlikely, we would note that China accounts for about 20% to 25% of Boeing's annual commercial aircraft deliveries, and about 10% operating profits at Boeing, based on our estimates. If China decides to retaliate, this could be a material impact on Boeing and its supply chain, here in the U.S. and abroad.

Brian Bernard: A large portion of my coverage list is tied to residential construction. We cover six homebuilders, building material firms such as USG, Mohawk, and Owens Corning. These firms really don't utilize aluminum or steel in the manufacturing of their products. So we really don't see any sort of impact there, especially with homebuilders. Most of their input costs are the land itself and lumber. 

Now, we do cover HVAC manufacturing companies. That would be Johnson Controls, Ingersoll Rand, and Lennox. Aluminum and steel, along copper, are key inputs to that manufacturing process. But when we dug a little bit deeper, we found that it's still really not a big percentage of their costs of goods sold. For Johnson Controls, aluminum and steel account for about 2% of cost of goods sold. It's a little bit higher for Lennox, 10%. When you do the math, even if we had a hypothetical 25% increase in steel, 10% increase in aluminum, it still really wouldn't have that big of an impact, and we think that these companies could increase prices; you only need a modest increase in price, let's call it 2 or 3% to cover that. We don't see a real big impact there.

Richard Hilgert: We view the tariffs on steel and aluminum as having minimal impact on demand for light vehicles in the United States. What causes us to believe this is that if you look at the weight of steel and aluminum used in pounds per vehicle, and the U.S. dollar price content per metric ton, on various indexes, you come up with a total of about a 1% increase in the average transaction price of a vehicle to consumers. On that basis, with average transaction prices rising, on average since 2012 at about 2% per year, we view the total increase from tariffs as being relatively minimal, giving very little impact to overall light vehicle demand. 

In this environment, we like BMW for its valuation. We think that the stock is priced at a level that investors should find attractive, trading at around an 80 Euro figure, versus our $110 fair value estimate.

David Whiston: We estimate vehicle pricing could go up a little less than 1% with the steel and aluminum tariffs. So for GM, if you made a rough assumption at say, 3 million vehicles a year sold in the U.S., that's roughly a $730 million hit to pretax profit, if they were not able to pass any of the amount through. I think the key here really comes down to, how long do these tariffs last and that's really up in the air right now. They actually haven't been instituted, as of March 5. I think it's important to remember for the automakers, they're on long-term contracts. GM for example, does collars on steels that last for about one to three years. Even if the tariffs go into effect immediately and even though GM and Ford use almost entirely U.S. sourced steel, the U.S. steel industry now has free rein with these tariffs to raise prices, up to 25%. That wouldn't necessarily hit GM or Ford right away. 

The other angle here, I think is politics, because you've already seen some schisms in the Republican party. Speaker Ryan came out today saying that he's against these tariffs, and then President Trump also tweeted on March 5, that he'll remove the tariffs if Canada and Mexico agree to a new favorable new NAFTA agreement. There's certainly an indication or a possibility that these tariffs won't last a very long time, and I think even if they do, a few hundred dollars per vehicle, that's not enough necessarily to drive millions of consumers away from the showrooms.