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9 Ways U.S. Import Tariffs Will Impact Steelmakers and Steel Users

A look at the potential effects of steel import tariffs across regions and sectors

Keith Schoonmaker, Morningstar Research Services LLC


U.S. President Donald Trump recently signed orders to impose import tariffs of 25% on steel and 10% on aluminum, shaking up global financial markets. But the exact form these tariffs will take remains unclear.

A blanket tariff covering all imports would be far more severe and, in turn, far more beneficial to U.S. steel and aluminum producers. But the consequences for U.S. metal users, while significant in aggregate, are far more diffuse, impacting industries from aerospace to aluminum cans.

In light of Trump’s move to enact import tariffs on steel and aluminum, Morningstar’s equity research group recently released a compilation of its research and what potential reactions may be seen across regions and sections. Here some highlights from the report.

9 key takeaways on U.S. import tariffs on steel and aluminum

  1. This development is a major boon for U.S. steelmakers. Our analysts’ forecasts now assume a wider spread between U.S. and world export prices. We raised our forecasts for U.S. steelmakers on Feb. 19 in anticipation of Trump enacting one of the more aggressive tariff options presented by the U.S. Department of Commerce. Still, we believe global steel prices are likely to fall in the years to come amid faltering Chinese fixed-asset investment and re-emergent global overcapacity.
  2. We’re not worried about direct effects on U.S. manufacturers. We consider no U.S. manufacturing firms to be directly affected by the steel and aluminum tariffs to sufficient extent that we have modified our fair value estimates, but second-order effects could have greater impact than the raw material price increase alone.
  3. The direct impact on Boeing is likely minimal, but retaliation from China appears to be the bigger risk. Steel and aluminum comprise a modest share of total aircraft costs, and Boeing may be able to pass on higher prices to customers via escalation clauses. But order cancelation from Chinese customers is the bigger risk to Boeing. China accounted for more than 25% of 2017 deliveries and represents an estimated 20% of Boeing’s backlog in unit terms.
  4. Steel and aluminum tariffs could have limited impact on light vehicle demand. U.S. automakers use almost entirely domestic steel and aluminum for their U.S. plants, and their suppliers also source in the U.S., based on our talks with GM and Ford. We estimate the tariffs could increase the average price of a light vehicle in the U.S. by roughly 1%. In our view, second-order effects could potentially carry a negative impact. For instance, a possible trade war with the rest of the world could ultimately lead to U.S. GDP contraction, which in turn could potentially lead to higher unemployment and slowing auto sales.
  5. We maintain our fair value estimates for HVAC manufacturers. We're not changing our fair value estimates for Ingersoll Rand, Johnson Controls, or Lennox International after Trump’s steel and aluminum tariff announcement. While steel and aluminum are key raw materials used to manufacture heating, ventilation, and air conditioning products, raw material costs are a relatively small portion of these firms' cost of goods sold.
  6. Makers of cans will likely feel a negligible impact from Trump’s steel and aluminum tariffs. We believe Ball, Crown, and Silgan should experience little long-term impact. All three benefit from favorable contract structures that pass through changes in metal costs. Ball and Crown also benefit from diverse global footprints. We expect only one or two quarters of earnings to be negatively impacted. Accordingly, our fair value estimates and narrow-moat ratings for each company are unchanged.
  7. U.S. steel tariff increases would only reduce fair value estimates on European capital good suppliers by 5%. We expect European capital goods suppliers to offset some of the tariff increases with price increases, as they have done with previous increases in raw material costs, including last year's 30%–40% increase in steel prices.
  8. The tariffs will likely have minimal impact on Asian steelmakers. That’s because the U.S. is a relatively minor market for most. We could see increased competition in the Asian steel market due to less steel being exported to the U.S. because of the steel tariff. But we think this only affects around 10 million tons of steel production, based on the amount of steel that is being exported into the U.S. from Asia.
  9. Australia’s largest steelmaker, BlueScope Steel, sees an uplift. We raise our fair value estimate for no-moat BlueScope Steel by 17%. Our updated fair value estimate reflects our expectation for targeted tariffs rather than a blanket tariff or quota. About 60% of the BlueScope’s uplift reflects the benefit of likely U.S. steel tariffs on the company’s North Star steel mill. We maintain the current level of earnings is unsustainable, and BlueScope is overvalued.

Our base-case expectations for U.S. steel prices, margins, and shipment volumes continue to assume that final sanctions will be targeted. If Trump instead pursues a more widespread approach, we'd probably increase the fair value estimates for the U.S. steel and aluminum producers we cover. The direct impact of tariffs on steel and aluminum manufactures seems generally manageable to us, and while potentially harmful second-order effects – including retaliation by U.S. trade partners – are possible, we haven’t assumed major moves in our base-case forecasts.

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