Are The Steelmakers Tuning To The US-China Trade War?

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Australian Economy, Chinese Economy, Macro Economics, US Economy

What we lately have seen is a quite punitive scenario with regards to the world’s biggest economies post the decision of Donald Trump to impose heavy tariffs on imports of steel and aluminum, as announced in March 2018, and how China intends to mark this move with a counteracting measure on the US based products. The US had primarily indicated for a 25 per cent tariff on steel imports and a 10 per cent tariff on aluminum while granting temporary exemptions to Canada, Mexico, Brazil, the European Union, Australia and Argentina.

China’s Iron ore and Steel Association, which accounts for about 80 per cent of the country’s steel production, has been assessing the potential impact of US protectionist measures as announced earlier. It has not disclosed or discussed the possible counter-measures specifically, but the association had earlier suggested tariffs on American coal and electronics- based products. In such a macroeconomic condition, the share prices of individual companies could be affected severely than the pace of growth in either the US or Chinese economy. With this, Corporations like AK Steel Holding Corp. and United States Steel Corp., two US steel companies, were seen to be rising while steel consumers such as General Motors Co. and Ford Motor Co. saw their stock prices dipping a bit. The latest movement of the tariff war might make Australia sit in a sweet spot where they can sell or buy more cheaply considering the scenario at both the above markets. On the other hand, it will be crucial to see how companies to the likes of South32 Ltd. (ASX: S32) mound themselves, as the group sometime back highlighted that it does not intend to make significant concessions in favor of Australian steelmakers.

US–China trade war, the question arises: What are the targets for the two countries? An analysis of several products covered by the US latest action against China’s breach of intellectual property rights helped in classifying the products based on two criteria: the technological content and the weight in China’s total exports to the US. This was also applied to China’s round of export tariffs. Based on the bottom-up estimation of the export value of the quantum of products, over 80 percent of the total value of the products are estimated to be under high-end exports, as also announced by the Chinese Government. The trade war is now expected to engulf over $100 billion of combined goods; and China being world’s biggest exporter of steel warned of firm action if their business interests get impacted.

The recent stance: While US has lately softened its stance and narrowed the scope against the metals which seemingly gives a sigh of relief to countries earlier thought to be bearing the brunt of the crossfire. There is news that the US Administration has reached agreements with Australia, Argentina and Brazil on the trading of metals and the details will be finalized soon. The US on the other hand, is extending negotiations with Canada, Mexico, and European Union. It is being estimated that Australia has over $40 billion trade relationship with the US, but the country’s imports are said to be more than the exports. Thus, if Australia fails to get reprieved of the situation, then iron ore miners including BHP Billiton and Fortescue Metals might come under slight pressure, while BlueScope Steel might find itself in a favorable position with a significant portion of earnings coming from the US-based steel producer, NorthStar. Further, moves from China against the U.S. may help few ASX stocks that include travel stocks like Qantas, technology stocks like Xero and Dotz Nano, and some agricultural stocks. All in all, the interplay can weigh on iron and steel makers while stocks from other diverse sectors may benefit, and this may need some strategic transformation by iron and steel makers to manage the macro situation.


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