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The U.S. Government’s recent move of imposing 25% tariff on imported steel and 10% on imported aluminum has spurred concerns among investors about certain U.S. sectors, particularly construction — which relies heavily on steel and aluminum for raw material. This has resulted in a widespread fear of retaliation from America’s trading partners around the world, leading to concerns of a trade war which might upset the entire global economy.
Per data provider Statista, the construction industry accounted for two-fifth of U.S. steel demand in 2017. Being an integral part of the supply chain, steel is widely used in every part of the supply chain, from sourcing raw material to construction and manufacturing activities as well as for freight purposes.
The latest proposal, which is in sync with President Trump's “America First” policy, has been designed with hopes of reviving steel prices and increasing the pricing power of U.S. steel makers. However, the move has left other sectors, including construction and its supply chain, apprehensive about higher input costs and contracted margins.
In fact, the impact of the policy on the supply chain and downstream activities in the construction sector has already stoked fear among investors. Also, they have been worried about the adequate availability of domestic steel in the market that might lead to supply constraints and higher prices.
Given this backdrop, let’s find out the impact of tariffs on imported steel and aluminum on construction stocks and other vulnerable sectors.
Impact of the Tariffs
Although the announcement has been a positive one for American steel makers, it has left consumers of the metals including construction, automobiles and machinery anxious about higher tariffs that might inflate their manufacturing costs. The expected increase in the price of raw materials, would inflate manufacturing costs, thereby making downstream U.S. industries (which are already grappling with higher costs due to recent lumber tariffs) in the construction sector less competitive.
The latest move may prompt some of the companies to move production facilities out of the country, import finished products, which is, ironically, the exact opposite of Trump’s stated objective of bringing back factories to the United States.
Moreover, the tariffs are expected to spur layoffs in the construction sector, which utilizes steel and aluminum as intermediate goods. Per a report from the Trade Partnership, the tariffs will reduce employment in every other sector, which will most likely have a greater impact than the benefits from the increase in steel and aluminum production. According to a survey completed by Deloitte, 53% of the U.S. companies have a critical dependency on their suppliers but about nine out of 10 are not completely prepared to tackle uncertainties. Therefore, these U.S. constructors and manufacturers need to take up the challenge to diverse their suppliers base in short span of time, and any failure to do so could cut into their profits and ultimately spur layoffs.
4 Construction Stocks to Avoid
We have picked four stocks with the help of the Zacks Stock Screener from the construction sector that have been plagued by the current market scenario.
Orion Group Holdings, Inc. ORN is a construction company, which provides services on and off the water primarily in the United States, Alaska, Canada and the Caribbean Basin. The company's operating segment consists of heavy civil marine construction segment and commercial concrete segment. The company currently carries a Zacks Rank #4 (Sell). Orion’s shares have dropped 12% in the past week compared with the construction sector’s decline of 1.7%.
Sterling Construction Company Inc STRL is a holding company, which has been historically operating as a wholesale distributor to the automotive aftermarket and construction through two subsidiaries — Steel City Products and Dowling's Fleet Service. This Zacks Rank #4 company is expected to face challenging business conditions in light of the headwinds discussed above. Investors too feel the same, as in the past week, Sterling’s shares have lost 7.6% compared with the construction sector’s decline of 1.7%.
Norbord Inc. OSB is a producer of wood-based panels for industrial manufacturers, retail chains as well as contractor supply yards. It operates primarily in North America and Canada. The company currently carries a Zacks Rank #4. Norbord’s shares have lost 2.5% in the past week compared with the construction sector’s decline of 1.7%.
Armstrong Flooring, Inc. AFI is engaged in the design and manufacture of flooring solutions primarily in North America. The company operates through two segments — Resilient Flooring and Wood Flooring. We advise investors to steer clear of this Zacks Rank #4 stock as of now. The company’s shares have lost 4.7% in the past week compared with the construction sector’s decline of 1.7%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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