US TARIFFS PLAY INTO THE HANDS OF STEEL PRODUCERS
▶ With new levies protecting them from importers, producers of the metal in Europe are prospering
Washington’s tariffs on steel imports have prompted warnings of an earnings hit for European producers – but for companies such as ArcelorMittal, based in Luxembourg with operations in increasingly protected markets, levies are expected to yield a profit bonanza.
The United States slapped 25 per cent tariffs on steel imports earlier this year, prompting such shipments to fall 7.5 per cent to 18 million tonnes in the first half, with further declines expected.
The tariff move coupled with strong demand has sent US hot rolled coil steel futures to decade highs around $900 a tonne, up 35 per cent on the year.
This has been a boon for European steel makers that can still sell into the US despite the tariffs, and which since last month have been protected by EU steel tariffs imposed in response to the US levies.
European steel makers are also benefiting from capacity cuts in China and robust global growth.
Despite this, investors are reticent to bid up the stocks due to concerns the global trade rift triggered by Washington’s steel tariffs will be protracted, eventually damaging growth and demand.
“Trade wars are a risk, but right now steel stocks are only pricing in negatives,” a Swis fund manager based in Switzerland said.
The Thomson Reuters index of European steel equities is down 5 per cent this year, highlighting trade fears. By contrast, European hot rolled coil steel prices have risen 5 per cent in the same period.
ArcelorMittal, Europe’s biggest steel maker and the second-largest in the US, posted bumper profits for the latest quarter, citing protectionism as one reason.
“People assume tariffs are bad for all companies, but in the case of steel makers, tariffs are rather good,” said Fabrice Theveneau, head of global equities at Lyxor Asset Management.
Also a plus is that steel makers outside China are mostly using profits to repay debt instead of investing in new capacity, just as Chinese capacity is shrinking, analysts and investors say.
China produces half of the world’s steel. It has cut 150 million tonnes of steel capacity since 2016, while its steel exports fell 31 per cent last year.
“Steel makers have never had it so good,” said Alistair Ramsay, head of research at Metal Bulletin Research. “We see a high pricing environment for steel majors for some time, they just can’t be ridiculous [with price rises].”
Mr Ramsay sees US hot rolled coil prices down $100 a tonne by the end of the year as local steel makers boost production and high prices crimp demand, but he believes steel makers’ profits will be protected.
This is because they can afford to cut prices – a move that will allow them to sell more in a fast-growing economy.
In the EU, by contrast, prices are expected to rise by the yearend as tariffs cut steel imports by 5 million tonnes or 3 per cent, according to investment bank Jefferies. Earning multiples also suggest steel equities are cheap, the bank says.
However, while Europe’s multinational producers may be riding a wave, companies that rely on steel for the manufacture of their goods for export are more concerned.
The US has finalised the next China tariff list targeting another $16 billion in imports as of August 23, the US Trade Representative’s office said.
China is slapping additional tariffs of 25 per cent on $16bn worth of US imports from fuel and steel products to cars and medical equipment, the Chinese commerce ministry said last week, also activating them on August 23.
In the case of China, Donald Trump threatened that he was ready to impose tariffs on an additional $500bn of imports. The US has already imposed tariffs on $34bn of Chinese imports. In return, China has levied taxes on the same value of US products.
In response, car dealers in China said Mercedes maker Daimler has moderately raised prices in the country of its GLE midsize 4x4, which is produced in Alabama. Daimler is looking at ways to mitigate the impact of the trade tensions, including reviewing whether to shift some US production to Asia. The company blamed tariffs for a 30 per cent drop in second-quarter profit.
Chinese-owned Volvo Cars said it was shifting production of its top-selling 4x4 production for the US market to Europe from China to avoid Washington’s new duties on Chinese imports.
The Alliance of Automobile Manufacturers, whose members include General Motors, Volkswagen and Toyota, also warned on the impact of the tariffs. A study released by a US car dealer group warned that the tariffs could cut US car sales by 2 million vehicles.
Elsewhere, wind turbine maker Siemens Gamesa warned that trade tensions would drive up US costs by 2 to 4 per cent, depending on the product and whether further tariffs are imposed. The company is working to reduce the impact on margins by optimising its supply chains.
French electrical equipment company Schneider Electric foresees growth slowing in the second half of the year and expects the first extra costs linked to higher US tariffs, which could reach €20m (Dh83.83m).
It remains to be seen whether Europe’s big steel makers will suffer the same jitters if the US-China trade fight goes long term.