Why We Aren’t Reeling Over Steel Tariffs

June 8, 2018 Craig Maddock

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The cameras are rolling at the 2018 G7 Summit in Charlevoix, Quebec, in the next act of a global trade drama.

Since the United States imposed tariffs on steel and aluminum imports from the European Union, Canada and Mexico last week, the public row between Prime Minister Justin Trudeau and U.S. President Donald Trump has been entertaining, to say the least.

Despite talk of trade war, the U.S. trade penalties—25% on steel and 10% on aluminum—have had little impact on investors and companies in our MD portfolios.

The market responds... exactly as we’d expect

The stock prices of U.S. steel and aluminum producers lifted by about 3% the day the tariffs were announced, while stocks of heavy steel users such as Harley-Davidson, Inc., Caterpillar Inc. and Deere & Company dipped approximately 2%.

No surprise: as input costs go up, profits go down.

Why we’re not so heavy on the metals

You may think of a steel producer like Canada’s Stelco as “big”, but consider that the company’s market capitalization is $2.3 billion, compared to that of Royal Bank at $109 billion and Apple at $1 trillion. Even global steel companies aren’t generally that large, limiting investment opportunities.

Our own exposure to steel and aluminum stocks is small and mainly international, for a total weighting of about 0.8% across MD equity portfolios. That’s why, to us, the tariff talk on steel and aluminum is noise, not news.

Holdings include Norway’s Norsk Hydro ASA, one of the world’s largest integrated aluminum companies, in MDPIM International Equity Pool, MD International Value Fund and MD Equity Fund. This high quality, low cost producer draws less than 10% of revenues from the U.S., has a modest valuation, and is positioned to benefit from demand in the auto sector, consumer packaging and electrical applications, according to analysis by our Atlanta-based sub-advisor Ernest Partners.

Several MD portfolios hold shares in Austrian steel company Voestalpine AG, including MD Fossil Fuel Free Equity Fund, MD Growth Fund and MD International Value Fund. Roughly 3% of the company’s sales may be impacted by the U.S. steel tariff, according to Ernest Partners, yet continued demand for its ultra-high-strength, lightweight auto parts and components is anticipated.

Tallying the true cost of tariffs

The new steel and aluminum tariffs will likely raise the price of many products for American consumers, as U.S. purchasers of Canadian steel and aluminum pay more for imports.

Measures that spur jobs and profits for U.S. steel and aluminum makers may hurt other U.S. manufacturing sectors due to higher cost of materials—one U.S. economic consultant estimates 16 jobs lost for every steel/aluminum industry job gained.[1]

Will Canada have its Love Actually moment?

As G7 leaders convene in Quebec, our own prime minister might take a cue from actor Hugh Grant’s Love Actually speech. In this 2003 rom-com, the British Prime Minister tells off a sleazy U.S. president, played by Billy Bob Thornton, who threatens the nation’s relationship (AND hits on his love interest).

“We may be a small country, but we’re a great one too,” Grant’s character addresses the press gallery.

“A friend who bullies us is no longer a friend. And since bullies only respond to strength, from now onward, I will be prepared to be much stronger. And the President should be prepared for that.”

Yeah, sure. Except might is right.

The best line in real life so far may be from Trump’s National Economic Council chairman, Larry Kudlow: He downplayed retaliation by trade allies and likened current affairs to a “family disagreement.”

In this drama, Canada is along for the ride while a powerful trading partner writes the script.

Whether the steel and aluminum tariffs are here for good or just a U.S. negotiating tactic, our low investment exposure makes it easier for MD clients to watch this sub-plot for sheer entertainment value.


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