Steel and Aluminum Tariffs Declawed

U.S. Trade Representative Robert Lighthizer announced that additional countries have received exemptions from the Trump administration's steel and aluminum tariff program. The tariff program will now exempt the European Union, Argentina, Australia, Brazil, and South Korea, in addition to the initial exemptions for Canada and Mexico. All exemptions have been advertised as temporary pending further trade negotiations. However, we view their reversal as unlikely and, instead, expect them to be sustained.

Our steel and aluminum price decks are unchanged based on this news, as the spread we forecast between U.S. and global steel and aluminum prices already assumed that key trade partners with which we have amicable diplomatic relationships would ultimately receive exemptions. Admittedly, however, we didn't expect additional exemptions to come so soon after the tariff program was announced. The reversal of exemptions for any key steel exporters to the U.S. would require us to reassess our base-case assumptions and would likely inspire an increase to our existing price decks for each commodity.

We anticipate that the spread between U.S. prices and marginal cost on a global scale will remain wider than we've observed historically. However, over the long run, we forecast materially lower global steel and aluminum prices to take hold, driven by decelerating Chinese fixed-asset investment, waning Chinese stimulus effects, and faltering cost support from steelmaking raw materials. This view supports our bearish outlook for U.S. steel and aluminum producers, as all such companies we cover are trading above fair value even after today's sell-off.

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