Today saw a significant surge in U.S. Steel stock prices.
Today saw a significant surge in U.S. Steel stock prices.
American steel stocks, specifically U.S. Steel (X), decreased by 2.82%, Cleveland Cliffs (CLF) by 3.74%, and Steel Dynamics (STLD) by 1.43% on Wednesday, saw significant rises of 8.2%, 20.1%, and 13.8% respectively.
The causes behind this unexpected rally are clear. Investors seem optimistic about the reelection of Donald Trump, believing it will be advantageous for steel stocks due to Trump's pro-tariff policies and lower corporate tax rates. Furthermore, the potential acquisition of U.S. Steel, which has been on hold, could potentially be reconsidered. However, this may not necessarily happen.
Tariffs and tax cuts offering temporary advantages
Trump has been a strong advocate for supporting U.S. manufacturing industries through the implementation of tariffs on imported goods. Additionally, during this campaign, Trump proposed reducing the corporate tax rate from 21% to 15%. This, combined with higher tariffs on steel imports, could potentially boost prices for U.S. consumers, despite the steel industry currently experiencing a temporary slump.
Automotive-grade steel demand surged during and following the pandemic, only to then decline to its current lower state. If tariffs can help elevate steel prices and profit margins along with lower corporate taxes, that could be advantageous for the steel industry - provided that the demand for steel eventually stabilizes.
The potential acquisition of U.S. Steel could be revisited. Cleveland Cliffs had initially proposed purchasing U.S. Steel for $35 per share. However, a larger Japanese steelmaker, Nippon Steel, made a higher offer of $55. This deal, however, has been met with opposition not only from Biden's anti-merger administration but also from Trump himself. However, with the Republicans believed to be more accepting of mergers than the current administration, there could be a higher chance of a deal being reached with Nippon or possibly Cleveland Cliffs.
On Monday, Cleveland Cliffs saw a drop in share prices due to losses in earnings and falling short of analyst expectations. This could be the reason it's performing better than other stocks at the moment. Further, there might be an opportunity for a deal with U.S. Steel if Nippon's offer is rejected again by Trump.
Globally, consolidation could be beneficial
In the global market, U.S.-based steelmakers often struggle to maintain a substantial market share. As a result, they could potentially benefit from increased consolidation, even if it involves merging with foreign companies such as Japan's Nippon Steel.
The rally might be short-lived
While tariffs could temporarily help steel stocks in the short term, it's essential to note that tariffs were also implemented in 2018 during the first Trump administration, but this didn’t prevent an industry downturn in 2019. Tariffs limit competition from foreign markets but also increase prices for consumers, which could potentially reduce demand. Additionally, tariffs can only partially offset larger global supply and demand dynamics in a global commodity market such as steel.
The steel industry could experience a revival with an automotive industry upcycle within the year. However, it's important for investors to pay close attention to market trends as a sign of whether it's a good time to invest in steel stocks or not, rather than relying solely on government-driven tariffs as a catalyst.
Investors are eagerly considering the potential advantages of Trump's pro-tariff policies and lower corporate tax rates, which could positively impact steel stocks. This increased optimism has led to some significant investments in steel companies recently.
Furthermore, the potential acquisition of U.S. Steel, currently on hold due to opposition, might be reconsidered if the political climate changes, offering another opportunity for financial growth in the steel industry.