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Tariffs Boost US Steel Stocks' FY18 Earnings: Worries Ahead?

Anindya Barman
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U.S. steel makers racked up strong earnings in 2018, courtesy of the Trump administration’s trade actions on imported steel. The 25% tariff on steel imports, which the U.S. administration levied in March 2018, provided a thrust to U.S. steel prices, as reflected by the significant run-up in benchmark hot-rolled coil (“HRC”) steel prices. The steel tariffs also provided more pricing power to American steel makers.
 
The tariffs injected a new lease of life into U.S. steel producers, who long struggled to cope with a tide of subsidized foreign imports. The punitive tariffs led to a decline in U.S. steel imports in 2018. The tariffs are also boosting production capacity of U.S. steel producers amid lower imports.

Improved capacity drove U.S. steel production in 2018. Per the World Steel Association ("WSA"), crude steel production increased 6.2% to 86.7 million tons (Mt) in the United States in 2018. U.S. steel shipments also went up 4.8% year over year in 2018, per data from the American Iron and Steel Institute (“AISI”), an association of North American steel makers.

American Steel Makers Forge Solid Earnings in 2018

Higher steel prices boosted profits of U.S. steel producers including United States Steel Corp. X, Nucor Corp. NUE, Steel Dynamics, Inc. STLD and AK Steel Holding Corp. AKS last year with a few of them posting record earnings for the full year.

Steel Dynamics, the first major American steel producer to report fourth-quarter results, logged record profit of $1,258.4 million or $5.35 per share in 2018, up around 55% from $812.7 million or $3.36 per share in 2017. Earnings rose on the back of higher prices and record steel shipments.

Nucor also delivered record-setting earnings in 2018. The company’s profits shot up nearly 80% year over year to $2.36 billion or $7.42 per share. The results were driven by higher sales prices and record shipments.

Moreover, U.S. Steel’s profits surged nearly three-fold year over year to $1,115 million or $6.25 per share in 2018. Higher steel prices contributed to the surge in profits.

Meanwhile, AK Steel churned out highest net income in a decade in 2018, buoyed by higher steel selling prices and shipments. It recorded profits of $186 million or 59 cents per share, up roughly 80% year over year.

Both Nucor and AK Steel currently carry a Zacks Rank #3 (Hold). Steel Dynamics carries a Zacks Rank #4 (Sell), while U.S. Steel has a Zacks Rank #5 (Strong Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A Tough Year Ahead for U.S. Steel Stocks?

While U.S. steel stocks reaped the benefits of higher domestic steel prices in 2018, the recent weakness in prices is a worry. The price momentum witnessed in 2018 is unlikely to sustain this year.

U.S. steel prices tracked downward in second-half 2018 and tumbled during the fourth quarter on concerns over a slowdown in steel demand in China, the world’s top consumer, amid a cooling Chinese economy.

In fact, after rallying to multi-year highs on the back of Trump administration’s imposition of tariffs on imported steel, U.S. steel prices have now fallen back to the levels seen prior to the tariff announcement. Notably, HRC prices went downhill in January 2019. While prices rebounded in February, they are well below their peak level reached in July 2018. As such, weaker steel prices may put pressure on selling prices of American steel makers and weigh on their bottom lines in the first quarter of 2019.

Moreover, a slowdown in steel demand in China amid a slowing domestic economy is a concern for the steel industry. The trade war has taken a heavy toll on the Chinese economy as reflected by China’s recent tepid economic indicators.

Signs of weakness across the country’s major steel end-use markets — construction and automotive — as reflected by a slowdown in real-estate investment growth and weak car sales have clouded steel demand outlook.

China’s economy grew 6.6% in 2018, the weakest pace in almost three decades. China has lowered its GDP growth target for 2019 to 6-6.5% amid challenges from trade friction with the United States, rising debt level and a slowing world economy.

The WSA expects steel demand in China to decelerate in 2019 due to continued economic rebalancing efforts and toughening environmental regulations. Trade tensions with the United States and a slowing global economy pose as downside risks for China. The trade body expects Chinese steel demand to remain flat year over year in 2019.

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