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ETFs in Focus as US Imposes New Tariffs on Structural Steel

Sweta Jaiswal, FRM

Just when investors were cheering the U.S.-China agreement to conduct trade talks in early October, the U.S. Commerce Department announced duties on Chinese and Mexican structural steel. The Trump administration has levied duties of up to 141% on Chinese structural steel and up to 31% on Mexican structural steel. Based on these rates, the U.S. government will start collecting cash for imports (read: Trade War Gets Uglier: Here Are the ETF Winners & Losers).

Let’s see how this new decision will affect investors:

Why the Decision?

According to the U.S. Commerce Department, the decision to impose duties was based on a preliminary investigation finding that the Chinese and Mexican producers were breaching the U.S. anti-dumping laws. It claims that producers were dumping fabricated structural steel on the U.S. market at prices lesser than the fair market value.

The U.S. Commerce Department studied prefabricated items from beams, girders, columns plates and flanges for erection or assembly into structures, like buildings, parking decks, hospitals, arenas and ports.

Notably, these tariffs have been largely imposed to handle the Chinese downstream structural steel assemblies which skip those duties before entering the U.S. market. Investors should note that through anti-dumping laws and imposition of 25% tariffs on imported steel have already helped limiting the presence of Chinese steel products in the U.S. markets . Interestingly, the United States imported $897.5 million of fabricated steel from China in 2018 and $622.4 million from Mexico.

Impact of Tariffs

The move can escalate trade tensions between China and the United States at a time when they have agreed to reach a common ground. The latest ISM Manufacturing PMI reading in the United States has shown August as the first month of contraction in the manufacturing sector in more than three years. Also, early indicators used in Bloomberg Economics gauge recently indicated continued slump in economic growth in China on tough external conditions and weakening domestics market and sentiments in August (read: U.S. Manufacturing Shrinks: Sector ETFs That Grew).

Interestingly, China happens to be the world’s largest steel exporter, having total contribution of 13.5% of global exports in 2018. However, the imposition of tariffs has begun to hurt U.S. imports of Chinese steel. In fact, there was a 5% year-over-year decline in U.S. steel imports in the year-to-date 2019 (through March) period.

Meanwhile, Mexico is willing to lend support to its domestic firms which might suffer due to the move.

What to Expect?

Final report on the issue will be published by the Commerce Department on or about Jan 24, 2020. For locking the tariffs for a five-year period, the U.S. International Trade Commission needs to conclude that American steel fabricators witnessed losses from Chinese and Mexican imports.

ETFs in focus

Against this backdrop, investors can wait on the sidelines and keep a tab on the following ETFs:

VanEck Vectors Steel ETF SLX

The fund tracks the price and yield performance of the NYSE Arca Steel Index before fees and expenses. It holds 25 stocks in its basket and has 0.56% in expense ratio. It has accumulated $46.1 million in its asset base (read: Top and Flop ETF Areas of August).

iShares MSCI Global Metals & Mining Producers ETF PICK

The fund seeks investment results that correspond generally to the price and yield performance of MSCI ACWI Select Metals & Mining Producers Ex Gold & Silver Investable Market Index. It holds 198 stocks in its basket and has 0.39% in expense ratio. It has accumulated $220 million in its asset base (read: Worst Sector ETFs of August).

iShares China Large-Cap ETF FXI

This fund seeks long-term growth by tracking the investment returns, before fees and expenses, of the FTSE China 50 Index. It comprises 50 holdings. The fund’s AUM is $4.16 billion and expense ratio is 0.74% (read: Will China ETFs Survive the Moving Out of US Firms?).

iShares MSCI China ETF MCHI

This fund tracks the MSCI China Index. It comprises 464 holdings. The fund’s AUM is $3.57 billion and expense ratio is 0.59% (read: Fed & Trade Trigger Market Bloodbath: 6 Hot Inverse ETF Areas).

iShares MSCI Mexico ETF EWW

The fund tracks the investment results of the MSCI Mexico IMI 25/50 Index. It comprises 55 holdings. The fund’s AUM is $683.1 million and expense ratio is 0.47% (read: Mexico Tariff Plan Dropped: ETF Areas to Win).