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Are Trump’s Steel Tariffs a Bonanza For Perpetually-Unloved Canadian Steel Stocks?

— Benjamin A. Smith

Canadian steel stocks rarely garner much, if any, attention. There’s simply not much reason to notice considering the sector’s limited growth potential, cyclical nature, and generally yawning news cycle. But for the first time in forever, that’s changing. Donald Trump has provided the catalyst which may allow the industry to flourish—potentially bringing outsized returns with it.

Of course, the news comes courtesy of the U.S. president’s decision to slap a 25% tariff on foreign steel imports. The move was a natural extension of Trump’s ‘MAGA’ movement, dedicated to rebuilding American industries and jobs which had long been the victim of outsourced globalization. With Trump focusing attention on trying to equalize record trade deficits abroad, two manufacturing staples—steel and aluminum—have become the opening salvo in this new global trade war.

And that’s perfectly fine from a Canadian steel industry perspective.

The reason? Canada has received a provisional exemption from the steel and aluminum penalties set to hammer the rest of the world. If the exemption becomes permanent, it means Canada’s steel prices just became 25% cheaper (10% for aluminum) via the rest of the world (with the exception of Mexico) without having to drop domestic prices one penny. Mexico received the exemption as well, but it only accounts for about 8.58% of U.S. imports according to Commerce Department data.

U.S. Imports of Steel Mill Products – Commerce Department Data

Country Census Data
Annual
Total
Value
2013
Annual
Total
Value
2014
Annual
Total
Value
2015
Annual
Total
Value
2016
Annual
Total
Value
2017
WORLD $28,812,582 $37,841,077 $30,230,032 $22,253,388 $30,999,422
CANADA $5,065,268 $5,688,007 $4,768,195 $4,051,475 $5,460,696
BRAZIL $2,068,937 $2,647,544 $2,343,954 $1,661,093 $2,614,504
KOREA $3,062,043 $4,299,856 $3,445,416 $2,333,612 $2,945,893
MEXICO $2,498,829 $3,154,790 $2,126,256 $1,962,444 $2,667,142
TURKEY $754,953 $1,441,936 $1,456,720 $1,079,934 $1,291,491

(Source: U.S. Commerce Department)

Unlike some nations where steel production overcapacity is rampant, this isn’t the case in America. A senior White House official recently explained that six U.S. aluminum smelters have shut down in recent years, leaving just five operational in the continental U.S. Of those, only two are currently are operating at full capacity, leaving America at risk of over-dependence on foreign suppliers.

That’s a huge advantage for Canadian steel companies. Not only are products much cheaper on a relative basis, U.S. import demand should be robust for the foreseeable future.

But don’t take our word for it. Shortly after Trump’s steel tariffs were announced, Russel Metals Inc. (TSE:RUS) called the move “nothing but positive… The impact for us can be nothing but positive because higher steel prices are good for us.”

These are impactful words coming from Canada’s only publicly traded steel distributor and processor.

 

“National Security Risk”

When the Trump administration declared steel stocks a matter of “national security”, most people scoffed at this perceived hyperbole. The belief was that “national security” was simply the guise to hit back at China or to bully Canada/Mexico into providing extra concessions during current NAFTA negotiations. After all, how could something so low-tech and plentiful be so important to defense?

But perhaps the consensus wasn’t thinking this through. As Lawrence Solomon from the Financial Post puts it, “Trump is old enough to know that during the Korean War, president Harry Truman seized the U.S. steel industry to maintain production for America’s then-vulnerable wartime economy.” Back then, America had suffered a steel shortage despite dominating world steel production at the time. It got so bad that Uncle Sam exhorted the public to donate their car bumpers to boost scrap steel supply.

So when looked at from a historical perspective, Trump’s national security concerns have more merit. They may even imply that America is looking to regain it’s production capacity in anticipation of future conflict with China.

While exploring that topic is beyond the scope of this article, one thing is certain: Unless something dreadful happens in NAFTA negotiations, Trump’s steel tariffs could provide a much-needed profit boost for Canadian steel companies. U.S. demand simply isn’t going anywhere, and neither does the U.S. have the production capacity to meet its needs.

By default, its reliance on Canada—which was already its second biggest steel importer—just gained that much more strategic importance. Along with the struggling value of the Canadian dollar, the planets are aligned for cheap steel stocks to provide nice intermediate returns.

Interesting names to look at here include: Stelco Holdings Inc. (TSE:STLC), Tree Island Steel Ltd. (TSE:TSL), and Russel Metals Inc. (TSE:RUS).

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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bsmith@midasletter.com |

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

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