While an increasingly protectionist trade policy from the White House has rattled steel stocks, one team of analysts on the Street is out with a note suggesting that the international trade threat may not be so bad from some industry giants. Even those with large U.S. businesses should be able to avoid a major hit from import levies, according to a New York investment firm, and as outlined in a recent Barron's report.
A variety of factors, such as geopolitical instability in countries like Italy, have caused a surge of volatility in the ninth year of the bull market, dragging U.S. equities down roughly 3.5% from January highs, yet still securing a 3.7% gain for the S&P 500 year-to-date (YTD). (For more, see also: Trade Uncertainty Already Hurting US Companies.)
Tariffs 'Not as Mono-Dimensional'
On Friday, President Trump announced new levies of 25% and 10% on European steel and aluminum imports, respectively. While taxes on goods coming into the U.S. hurts foreign companies that rely heavily on sales in America, Stephen Wood, chief market strategist at Russell Investments, expects steel and aluminum exporters Arcelor Mittal (MT) and Rio Tinto (RIO) to feel little of the anticipated burn.
"What gets tweeted and what happens is actually quite different,” stated Wood. “Tariffs are not as mono-dimensional for these globally diversified metals and mining companies as they once were." The analyst suggested that many companies can easily shift production to the U.S., where they already have operations, and avoid tariffs altogether. Additionally, since tariffs are levied on only the metals, and not raw materials such as iron ore or alumina, steelmakers could be more strategic in shifting their production geographically. (For more, see also: Where to Invest for a Trade War: Goldman's View.)
Luxembourg-based Arcelor Mittal, which saw its shares trade nearly flat over the past five trading sessions, attributes roughly 21% of its revenues to the U.S., compared to 49% from Europe. As it shifts production to America, it will position itself to benefit from higher prices, while a majority of its sales will remain unaffected, as noted by Barron's.
New York-based Russell Investments highlighted Australia's Rio Tinto as another steel manufacturer with a particularly geographically diversified business. RIO, whose stock jumped 1.3% last week, produces aluminum and iron ore, and generated 14.3% of its $17.7 billion in annual sales from the U.S in 2017, compared to 44% from China and 8.6% from Europe.
As for U.S.-based steel makers, the future looks a little less bright, especially considering speculation of retaliatory imports. Last week, analysts at Goldman Sachs reduced their price target on shares of AK Steel Holding Corp. (AKS), writing that the steelmaker has limited profitability potential despite the Trump administration's push for more import levies. (For more, see also: AK Steel Slashed to Sell Amid Trade Worries.)