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Steel Stocks Take Flight as DOC Proposes Tariffs on Imports

Zacks Equity Research
The Commerce Department's recommendations provided a boost to the stocks of American steel companies that are struggling to cope with a tide of cheap steel imports.

Shares of major American steel makers got a lift last Friday after the U.S. Department of Commerce (DOC) issued the long-awaited reports on its probe into imports of steel and aluminum products and recommended President Donald Trump to impose tariffs or quotas on these imports.

The DOC’s investigations, which were carried out under Section 232 of the Trade Expansion Act of 1962, were aimed at determining whether the imports pose a threat to national security. The Trump administration ordered the investigation last year.

The DOC found that these imports “threaten to impair the national security” as defined by Section 232. The reports are currently under consideration by President Trump and no final decisions have been made on the recommendations provided in the reports, the DOC noted.

DOC Recommends Broad-based Actions

The DOC Secretary Wilbur Ross recommended several options (including tariffs and quotas) to address the problem of steel imports. Ross proposed at least 24% global tariff of on all steel imports from all countries.

The other proposed alternatives are at least 53% tariff on all steel imports from Brazil, China, Costa Rica, Egypt, India, Malaysia, Republic of Korea, Russia, South Africa, Thailand, Turkey and Vietnam with a quota by product on steel imports from all other countries equal to 100% of their 2017 exports to the United States and a quota on all steel products from all countries equal to 63% of their 2017 exports.

The DOC also stated that these alternatives are aimed at increasing domestic steel production to roughly 80% operating rate from its present 73% of capacity.

For aluminum, Ross recommended a tariff of at least 7.7% on all exports from all countries. Another option is a 23.6% tariff of on all products from China, Hong Kong, Russia, Venezuela and Vietnam with quotas for all other countries equal to 100% of their 2017 exports to the United States. A quota on all imports from all countries equal to up to 86.7% of their 2017 exports has also been proposed.

Steel Stocks Rally

The DOC’s recommendations provided a boost to the stocks of leading domestic steel companies. United States Steel Corporation X racked up the biggest gain with its shares rising 14.8% last Friday. AK Steel Holding Corporation’s AKS shares rallied 13.7% while Steel Dynamics, Inc. STLD and Nucor Corporation NUE notched up 4.8% and 4.5% gains, respectively. Shares of Commercial Metals Company CMC also popped 5.8%.

AK Steel lauded the DOC’s recommendations and said, in a statement, on Feb 16 that “We are pleased with the recommendations by Secretary Ross that tough and effective actions be taken in a holistic manner to mitigate the flood of steel imports into the U.S.”

Both U.S. Steel and Steel Dynamics sport a Zacks Rank #1 (Strong Buy). While Nucor carries a Zacks Rank #2 (Buy), both AK Steel and Commercial Metals currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Imports Still Haunt American Steel Mills

Domestic steel makers struggled to cope with a renewed tide of cheap steel imports last year. Imports of cheap steel continue to flood American shores despite a string of punitive trade actions (in the form of heavy tariffs) and threats of further future measures. These imports have hurt selling prices and margins of U.S. steel makers.

According to the American Iron and Steel Institute (AISI), an association of North American steel makers, total steel imports shot up 15.4% to around 38.1 million net tons in 2017. Finished steel imports for 2017 also increased 12.2% to around 29.6 million net tons, per the AISI. For full-year 2017, finished steel import market share was an estimated 27%, which is higher than 26% clocked in 2016.

Although positive rulings in trade cases (resulting in levy of heavy tariffs) against China led to a decline in Chinese steel exports to the United States, imports from other countries remain at above historical levels.

According to AISI data, finished steel imports from China fell roughly 5.7% year over year in 2017. However, imports from other countries such as Germany, Taiwan, Brazil and Russia spiked last year.

U.S. steel makers continue to pin their hopes on President Trump imposing new restrictions on imported steel. The President has until Apr 11, 2018 to make a decision on the DOC’s steel recommendations. A positive decision would provide a significant thrust to steel prices and give domestic steel makers more pricing power.

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