Steels Tariffs: One Year Later

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Includes: AKS, NUE, SLX, STLD, X
by: Dividend Power
Summary

Steel tariffs have improved the financial performance of some large steel companies.

Jobs growth has been flat since steel tariffs have been imposed due to productivity gains in the industry and low capacity utilization.

The stock prices of some large steel companies have experienced significant double-digit declines.

Industry trends indicate increasing supply, slow demand growth and weaker pricing keeping a lid on stock price gains.

Overview

Tariffs and trade wars are on the minds of almost all investors. The past two weeks have seen a dramatic shift in sentiment regarding resolution of tariffs and trade wars. Many investors believed that a trade deal was imminent between the U.S and China. However, the recent rhetoric and then the additional tariffs imposed by the U.S. on Friday, May 10th and by China on Monday, May 13th has increased the uncertainty on when the tariffs will be lifted.

Saying that, small investors have a clear example about the effect of tariffs on U.S. steel companies. Steel tariffs have been imposed for over one year. On March 1, 2018, a 25% tariff was imposed on steel imports from most countries. One June 1, 2018 this was extended to the EU, Canada and Mexico. If tariffs were beneficial for U.S. steel companies then the effect should show up in financial results, jobs and importantly stock prices. In this article I discuss the effect of steel tariffs on all three. Since the tariffs were imposed, it is clear that some but not all companies in the steel industry are performing better from a financial perspective. But there has been little increase in the number of jobs and surprisingly stock prices are significantly lower.

Steel On Rail Cars Source: washingtonexaminer.com

Financial Results

To examine the effect of steel tariffs on financial results we compare financial results for Q1 2018 (pre steel tariffs) and Q1 2019 (post steel tariffs) for United States Steel Corporation (X), Nucor Corporation (NUE), AK Steel Holding Corporation (AKS) and Steel Dynamics Inc. (STLD).

The top and bottom lines of both U.S. Steel and Nucor increased since tariffs were imposed as seen in the chart below. This is likely due to a combination of increased volume, increased pricing, cost efficiency and the generally robust economy. AK Steel Holding had flattish revenue and went from a profit of $0.09 per share to a loss of ($0.01) per share. Steel Dynamics increased revenue, but EPS was lower.

Comparison of Revenue and EPS Pre- and Post-Tariffs After One Year

Company

Revenue

Diluted EPS

Q1 2018

Q1 2019

Q1 2018

Q1 2019

U.S. Steel

$3,149

$3,499

$0.10

$0.31

Nucor

$5,568

$6,097

$1.10

$1.63

AK Steel Holding

$1,659

$1,698

$0.09

($0.01)

Steel Dynamics

$2,604

$2,817

$0.96

$0.91

Source: Dividend Power based on data from Morningstar.com

Notably, tariffs initially caused an increase in U.S. steel prices of about 40% that benefitted steel producers. But that was followed by a decline in the latter part of 2018 as seen in the chart below. Steel prices in the U.S. are currently lower than in January 2018. Although steel prices initially increased this was offset by increasing supply and flattish or slow demand from the automotive and construction industries. Furthermore, the U.S. experienced a slowdown at the end of 2018 that probably detrimentally impacted steel prices.

Steel Prices in Since January 2018.

U.S. Steel Prices

Source: tradingeconomics.com

This analysis indicates that there was no clear industry-wide benefit due to tariffs. If there was an industry-wide benefit, then almost all steel companies should exhibit sustained improvement in top and bottom lines. But that did not occur. Some companies benefited but other companies showed only marginal benefits. In any case, going forward, I do not expect significant improvements in revenue and EPS due to relatively weaker pricing and slow demand from the automotive and construction industries.

Jobs

Improving top and bottom lines for steel companies should drive expansion and in turn create more jobs. However, hiring has remained stagnant even after several mills reopened and restarted last year. Notably, direct steel industry employment was reportedly 146,300 as of November 2018, which is 4% lower than it was in 2014. There has been a downward trend in employment in both blast furnaces and steel mills and also iron and steel foundries since 2013 as seen in the chart below.

Employment in the U.S. Steel and Iron Industry from 2013 to 2018

U.S. Steel Industry Employment

Source: statista.com

In fact, that trend has been in place since 1990 as seen in the figure below. Steel producers are able to make the same amount of steel as in 1990 but with 50% to 60% less employees. This is a result of increasing productivity from automation and technology improvements. For instance, in 1990, U.S. steel workers produced 478 tons of steel per person. But in 2018, U.S. steel workers were twice as productive making almost 1,000 tons of steel per person. Furthermore, the industry was at a fairly low capacity utilization of 73% in early 2018 that increased to about 80% in early 2019. This has driven increases in top and bottom lines at some steel producers, but this has not translated to job increases. The chart above shows that job growth in the industry was relatively flat from 2017 to 2018. One reason is that the steel industry has the ability today to expand or contract production depending on demand. It essentially takes the same number of people to run a blast or electric steel furnace at 70% or 100% utilization.

Steel Production and Employment Since 1990

Steel Production and Employment

Source: bloomberg.com

This analysis shows that there was no clear industry-wide positive or negative impact on the number of jobs. The long-term trends of increasing productivity are still in place and will likely keep a lid on job growth in the industry.

Stock Prices

Surprisingly, despite the improved financial performance of some steel companies, stock prices have not responded in the expected manner. The VanEck Vectors Steel ETF (SLX) is down about 30% since its peak in early 2018. The stock prices of U.S. Steel, Nucor, AK Steel Holdings and Steel Dynamics are down significantly. The stock price of U.S. Steel is down almost 70% from its recent peak in early 2018 to $14.72. The stock price of Nucor has performed better but is still down almost 21% since early 2018. AK Steel holdings stock price declined ~65% since early 2018 to $2.27. Steel Dynamics stock price is down almost 40% since early 2018. This is likely due to a combination of a slowing global economy combined with the expectation that the tariffs will be removed at some point. Steel companies are also investing in new plants that is expected to increase supply by about 15% over the next few years. This has led to worries of oversupply that in turn would lead to weaker pricing in the next few years. This has likely pressured stock prices of steel producers.

Final Thoughts

Steel tariffs have not caused significant problems for the steel industry although it may have raised costs for end users. Saying that, steel tariffs have improved the financial performance of some of the largest steel companies. Job growth has been flat at best. Surprisingly, stock performance has been comparatively poor. Due to the current steel industry trends I do not expect significant stock price gains in the near future.

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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.