How Tariffs Will Impact Steelmakers and Steel Users

U.S. President Donald Trump recently shook up global financial markets by announcing plans to enact import tariffs of 25% on steel and 10% on aluminum. The exact form these tariffs will take remains unclear. We've updated our forecasts and fair value estimates based on the expectation of a targeted approach. A blanket tariff covering all imports would be far more severe and, in turn, far more beneficial to U.S. steel and aluminum producers. The consequences for U.S. metal users, while significant in aggregate, are far more diffuse, touching industries from aerospace to aluminum cans. Accordingly, our long-term forecasts and fair value estimates for these companies aren't meaningfully affected. Harmful second-order effects, including retaliation by U.S. trade partners, are possible, but we have not assumed major moves in our base-case forecasts. Perhaps the most damaging of potential reactions would be cancellation of significant

Key Takeaways

• We raised our forecasts for U.S. steelmakers on Feb. 19 in anticipation of Trump electing one of the more aggressive tariff options presented by the U.S. Department of Commerce. Our forecasts now assume a wider spread between U.S. and world prices. Still, prices for both are likely to fall in the years to come amid faltering Chinese fixed-asset investment and re-emergent global overcapacity.
• The tariffs have minimal impact on Asian steelmakers, as the U.S. is a relatively minor market for most.
• We consider no U.S. manufacturing firms to be directly affected by the 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.
• The direct impact on U.S. aerospace giant Boeing is likely minimal. 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. Retaliation 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.
• 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%.
• 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.
• We maintain our fair value estimates for HVAC manufacturers, as steel and aluminum represent a relatively small portion of these firms' cost of goods sold.
• Rigid-can-makers Ball, Crown, and Silgan should experience little long-term impact. All three benefit from contract structures that pass through changes in metal costs and have diverse global footprints.

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