Steel inventories are skyrocketing despite talks to cut tariffs. Here’s why.
The United States and Europe are in talks to remove Trump-era steel tariffs. The potential for lowering trade barriers has the potential to lower the shares of steel producers, but investors did not appear worried on Monday morning.
This was not the case at the start of the day. Actions of
Steel in the United States
(CLF) as well as the producers of electric arc furnaces
were down about 1.5% on average in pre-market trade.
Dow Jones Industrial Average
futures contracts, for comparison, were both down about 0.5%.
But steel producers’ shares are now up at the start of negotiations, adding to the gains so far this year. This quartet is up over 60% so far this year on average from Monday. Higher steel prices and increased demand for steel from a recovering economy are the two main reasons steel inventories are rising. And they are much more important than the general impact of tariffs on the sector.
Tariffs have the potential to lower steel prices by lowering the cost of imports. The United States is short of steel, and domestic production is insufficient to meet demand. The country has to import steel, which usually makes the price paid for imported steel the price set for the entire domestic market. Tariffs, of course, increase the price of imports by adding taxes.
Prices, however, do not always determine the direction of inventory. The demand for steel and the balance between supply and demand do a better job in this regard. From mid-2018, when the Trump administration imposed tariffs on European steel, until the end of 2020, shares of US Steel, Nucor and Steel Dynamics fell 54%, 20% and 21%, respectively. The S&P 500 rose 35% over the same period.
Unlike the underperformance of its peers, Cleveland-Cliffs stock rose 68% between mid-2018 and late 2020, as the recovery led by Lourenco Goncalves gained momentum.
European / American tariffs are not the most important tariffs in the steel industry. China is by far the world’s largest producer with around 55% of the world’s steel production capacity. There are still various tariffs and anti-dumping duties in place around the world that target Chinese steel.
The “dumping” of any product, including steel, generally refers to the sale of surplus products in the foreign market at prices lower than domestic prices.
The biggest risk to steel stocks is not tariffs. These are high prices. Steel prices have been peaking for several years and all the factors that push them down, including increased supply, could hurt steel stock returns.
Write to Al Root at [email protected]