A Quick Buck In Ford

| About: Ford Motor (F)
This article is now exclusive for PRO subscribers.

Summary

A quickly approaching court decision could have implications for users of US steel.

Users of American made steel, like US automakers, could see gains.

Investors can make short-term profits if a positive decision is made.

Ford Motor Company (NYSE:F) recently announced plans to lay off around 10% of its corporate staff, around 1,400 people. The downsizing came after lower-than-expected profit projections for 2017 compared to last year because of expensive investments by Ford into new technologies. At a time when capital investments are squeezing profits, the company may have some reprieve from suppliers, specifically because of changes in costs associated with steel imports.

For years, politicians have decried foreign nations dumping steel exports in the US at artificially low prices. China and India and the most noted actors, though they account for less steel imports than Germany and other EU states. The US Department of Commerce has now launched an official investigation into steel imports and specifically those used in select auto parts. Autos, being among the largest end users of these parts, would be the party to ultimately absorb higher costs. Any changes in trade policy (i.e. tariffs) could force some automakers to pass expenses onto consumers, likely costing some market share for foreign automakers while helping US-based auto manufacturers, including Ford.

While complaints of unfair trade practices regarding steel are not new, the current administration seems willing to exert its influence to enact tariffs on foreign imports. Not only was the dumping of steel, from China specifically, a main focus of the president's campaign, it has been a key policy priority of Commerce Secretary Ross (who has extensive financial interests in steel and other commodities) as well as newly confirmed US trade representative Robert Lighthizer (who worked as a steel industry lobbyist).

The Commerce Department is specifically looking into the alleged dumping of cold-drawn mechanical tubing. The department reported $153 million of the tubing was imported last year at prices 12-200% below US price levels. Many automakers utilize suppliers which source international steel. GM (NYSE:GM) and Chrysler (NYSE:FCAU) both use ArcelorMittal (NYSE:MT) as their main supplier of steel, though both source the commodity through various other suppliers as well. Ford uses Michigan-based Tower International (NYSE:TOWR) and Kentucky-based Metalsa S.A. Since Ford is already using American made steel, it is less sensitive to a potential price increase in foreign imports caused by tariffs.

Ford utilizes less steel than GM and Fiat Chrysler because it has largely switched the F-150 model to an aluminum body. Nonetheless, the company is still a major user of steel parts. While the company doesn't break down specific costs on every part, Tower International reported its steel contact with Ford to be worth $140mm in annual revenue. Any price tariff increase could increase costs for foreign brands by as much as 200% to match US prices. That change would result in foreign makers like Land Rover, Jaguar [both owned by Tata Motors (NYSE:TTM)], Hyundai Motor Group (OTCPK:HYMLF) (OTCPK:HYMPF) (OTCPK:HYMPY) (OTCPK:HYMTF), and Volvo (OTCPK:VLVLY) (OTCPK:VOLAF) (OTCPK:VOLVF) (OTCPK:VOLVY) to pass the price increases onto consumers, which benefits Ford.

The International Trade Commission (ITC) is set to hear the Commerce Department case on or before June 5th. An affirmative decision in favor of the US case would be positive for steel stocks like ArcelorMittal and U.S. Steel (NYSE:X), and a negative catalyst for foreign steel producers and their customers. Investors should watch for the ITC decision as it could provide a short-term trading catalyst. While potential tariffs do not directly impact Ford's bottom line, they could improve the company's market share as foreign manufacturers are forced to adjust prices to reflect higher input costs. Expect a decision affirming the US position to give Ford's stock a much needed little boost. An additional plus; an adverse decision is unlikely to have any negative impact on the stock as it keeps the status quo. So, what do you have to lose?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.