U.S. steel companies like U.S. Steel (X) have been clamoring for the U.S. to slap tariffs on foreign producers, who they claim have been selling to US companies at below-market prices. Late in Friday trading, steel companies finally got their wish–and a big bump in share price. Was it too big?
The Wall Street Journal reports that the Commerce Department determined that Korean companies had “dumped” steel tubes into the U.S and slapped penalties of 9.89% to 15.75% on some companies from that nation. The U.S. International Trade Commission must now decide whether to make those tariffs permanent.
JPMorgan’s Michael Gambardella and team call the decision “positive” for U.S. Steel and other U.S. steel companies:
Heading into the final ruling, U.S. Steel had shutdown some of its [oil country tubular goods, or OCTG] capacity and engaged with the rest of the industry and trade groups in an extensive public relations and political campaign to support their assertions that Korean imports were dumped unfairly and should have been assessed a preliminary AD margin. Heading into the final ruling, we believe market expectations for a favorable outcome were fairly low, despite producer’s assertions, given the inherent complexity and opacity in trade investigations. In this context and with a positive and retroactive ruling in place against Korean OCTG, we expect the stock will react favorably on July 14 after the full DOC ruling is reviewed over the weekend.
Wells Fargo’s Sam Dubinky says the tariffs aren’t “a game-changer” for U.S. Steel:
We estimate the price differential between domestic and foreign OCTG pricing near ~$200 per ton, well above the $100 threshold necessary to stave off imports. After adjusting for tariffs, we estimate the spreads would narrow to ~$65$-120/ton, which would provide modest room for domestic mills to raise pricing.
We are still cautious U.S. Steel as we believe shares have been rewarded prematurely on management’s commitment to institute deep costs cuts, which while positive, in our view could be overshadowed by weaker sheet pricing; we are bearish sheet prices due to import competition and raw material cost deflation. We are also concerned U.S. Steel’s cost advantage relative to peers will decline due to falling iron ore prices.
Shares of U.S. Steel have dropped 2.2% at 10:08 a.m. today after gaining 3.2% last Friday, while Reliance Steel (RS) has ticked up 0.1% to $73.64 and AK Steel’s (AKS) has ticked down 0.1% to $8.38.
UPDATE: US Steel Stock continue to slide after the WTO ruled against the US and in favor of China in a case involving steel products. Shares of US Steel have plunged 4.7% to $26.32 at 11:53 a.m., while Reliance Steel has dropped 1% to $72.79, AK Steel has fallen 2.7% to $8.15 and Steel Dynamics (STLD) has declined 2.1% to $17.82.
Source: blogs.barrons.com