The Fallout from Making US Steel Great Again

Last week we saw US President Donald Trump come out with specific tariff figures, to protect US steel and aluminium companies.

The President’s proposal is to impose tariffs of 25% on foreign steel, and a 10% tariff on aluminium imports.

Much of the steel demand in the US is used in the construction market. With huge plans for the US to rebuild their ailing infrastructure, and a US economy which is powering along, factors seem to be coming together for US steel makers.

It’s been a sector to watch for the last year or so.

You can’t say the recent steel tariffs are really news; it has always been on the cards.

Protecting US jobs was a key part of President Trump’s election campaign. Tariffs and reviving the US steel industry have always been on the Trump agenda and were a part of his pre-election pitch.

And in April last year, under the guise of national security, Trump moved. He launched a federal investigation to determine whether foreign-made steel threatened national security.

While last week’s news is great for US steelmakers, there are wider implications of such a move.

First of all, it’s likely to lead to higher prices for US businesses and consumers that require steel products.

A multitude of products require steel. Think of construction, car making and manufacturing.

And the higher costs are likely to be passed on to consumers down the line.

That will add to inflation pressures, just as US wages are on the rise, and as personal and business tax cuts add further stimulus to the economy.

Who will the steel tariffs affect the most?

Along with the impact on US consumers, the second concern is it could lead to unnecessary fights with friendly trading partners.

The tariffs seemed to be aimed at China from all the rhetoric, but China only accounts for roughly 2% of US steel imports.

Share of US steel imports by country 06-03-2018

Source: The Australian
[Click to enlarge]

If we look at the breakup, Canada is the biggest steel exporter into the US, followed by Brazil and South Korea. Other friendly nations like Germany and Japan are also among the top 10 steel exporters to the US.

A tariff on steel imports might not hurt China so much, but bring the US into unwanted trade fights with friendly nations.

It will be fascinating to see how Trump manages the fallout with friendly trading partners.

Should the tariffs get signed off this week, US steel companies will be the big winners.

But the market has been pricing in the likelihood of steel tariffs for some time.

Here’s a relative comparison chart plotting United States Steel Corp. [NYSE:X] with the benchmark S&P 500 Stock Index, from May last year.

United States Steel Corp. Chart 06-03-2018

Source: Optuma
[Click to enlarge]

What could Trump’s steel tariffs mean for the stock market?

Nothing surprises the market, so you just have to watch US steel stocks for now.

It might not be the best time to pile into US steel stocks. The good news has been priced into the share price for some time

But closer to home, the fallout from US tariffs has put ASX companies like Bluescope Steel Ltd [ASX:BSL] and Rio Tinto Ltd [ASX:RIO] in the firing line.

And it’s still unclear if Australian companies will be exempt from the tariffs.

But when political news like this comes out it’s easy to make rash decisions with regard to investments. For companies caught up in the tariff firing line, you could bring up the company price chart and let the charts be your guide.

The first thing to watch for is if the prior lows continue to hold despite the fallout from the US tariffs.

The market will price in the changes fairly quickly. If prior lows continue to hold for those stocks caught up in the tariff war, then the market is looking beyond the immediate bad news and factoring in continued stable revenues ahead.

The tariffs will affect some ASX companies no doubt, but rather than get caught up by all the news, watch the charts and see if prior lows are able to hold.

Newspapers are sold using emotional headlines. That’s not to say the reporting is misleading. But basing your investment decisions on emotional news from the press is not conducive to good decision making.

With a cool head, look at what the charts are telling you. If the tariffs are having a dramatic effect on those stocks affected, they will start to break prior lows. Then you might have to make some hard decisions on those investments.

This is what Time Trader does. It uses the charts to guide investment decisions rather than the news of the day.

If you want to find out more about using a charting approach to the market, learn about key dates to watch for in the market and how market events can be forecast in advance, learn more about Time Trader here.

Terence Duffy,
Lead Researcher, Cycles, Trends and Forecasts

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come — which he details in Cycles, Trends and Forecasts.

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