It started with Trump threatening to start a trade war with China. And now it has come around to a trade war with our North American neighbors and the European Union. Today the president announced that there will be tariffs on steel and aluminum imports from Canada, Mexico and the European Union. While economists and free-traders wring their hands in anguish we wonder this, should you invest in US steel companies?
United States Steel Producers
There are only two steel producers in the USA, Nucor and United States Steel Corporation.
US Steel was once the largest corporation in the world and a century ago it was the source of two-thirds of all steel produced in the USA. Today the company is responsible for 8% of all steel used in the USA. US Steel today is the world’s 24th largest steel producer and second in the USA behind Nucor.
Nucor is the 12th largest steel producer in the world. It is the largest operator of “mini mills” in the world. They use electric arc furnaces to melt scrap steel instead of the blast furnaces used to melt iron.
Taken together, production by the two United States steel producers falls far short of the amount of steel needed by the US economy. So, who is the USA getting its steel from?
CNN looked at the global steel industry and who exports to the USA.
When it comes to steel production, one country is miles ahead of the pack: China.
It accounted for a whopping 49% of the 1.7 billion metric tonnes of steel produced globally last year, according to industry group Worldsteel.
The European Union, Japan, India and the United States round out the top five producers.
When it comes to who the USA gets its steel from, China ranks number 5 behind Canada, South Korea, Mexico and Brazil. The USA produces 5% of the steel in the world while China produces 49%, the EU produces 10%, and Japan and India each produce 6%.
Trade War Era Investments
We already looked at what you can invest in and not get hurt by a trade war.
In that article we looked at stocks that would not be hurt by a trade war with China. Now, however the USA is picking a fight with its North American neighbors and the European Union, which despite all the hype about China, is the other super economy in the world beside North America. Perhaps rather than looking away from steel and aluminum which will be the focus of a trade war, we should look at them.
United States Steel
Here is what the market thinks about US Steel in light of the news about tariffs on foreign steel. The chart is from Google Finance, United States Steel Corporation.
The news of tariffs made the stock jump up in the first hours of trading but then it settled back down. The problem for US Steel is that they are not the corporation of old with lots of steel mills. They have had to close mills and streamline their operation to remain profitable and in business. They do not have the capacity in the short term to ramp up production. However, they should profit from high steel prices. The market is not impressed.
The market response with Nucor was similar to that of US Steel. The price popped up with the news of tariffs and then settled back down again. Here is the Google Finance, Nucor chart.
The issue with Nucor is the same as with US Steel. They are an efficient operation without much extra capacity. As such they may benefit from higher steel prices but are unlikely to expand their operations to any great degree.
So, should you invest in US steel companies considering the tariff situation? The answer is that you probably should wait and see.