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Morningstar | U.S. Steelmakers Trade Lower Due To Turkey Tariff Cut and Removal of Tariffs For Canada and Mexico

U.S. steelmaker shares traded lower on May 17, as reports indicated that U.S. government-imposed Turkish steel import tariffs would be reduced while those for Canada and Mexico would be lifted. Our outlook for the U.S. steel industry already assumed a gradual softening of trade protection over our explicit five-year forecast period, resulting in a decreasing premium for U.S. steel prices above world export prices. Therefore, our steel price deck and U.S. steelmaker fair values are unchanged. We reiterate our no-moat ratings for Nucor, Steel Dynamics, U.S. Steel, Commercial Metals, Schnitzer Steel Industries, and ArcelorMittal.

Canada and Mexico represent two of our largest steel trade partners by import volumes, accounting for 26% of total steel imports year-to-date through April (15% from Canada and 11% from Mexico). Only Brazil has exported more steel to the U.S. this year (19% of total import volumes). However, we had long-viewed the tariffs applied to Canada and Mexico as temporary, as they have been used primarily as leverage to catalyze an overhaul of NAFTA under then proposed USMCA. Admittedly, they persisted longer than we initially anticipated, as USMCA progress has been slow. Although their removal might seem like a boon for U.S. steelmakers, we caution that restrictive quotas might take their place. In the end, the relative impacts of a sizable 25% tariff and a restrictive import quota might end up being similar.

Therefore, perhaps surprisingly, we view the reduction in Turkish steel import quotas to 25% from 50% as more significant news. With diplomatic tensions remaining high between Turkey and the U.S., the tariff reduction took the market by surprise. Turkey is a large-scale rebar exporter and, accordingly, the news had the most significant impact on rebar-centric steelmaker Commercial Metals. Nucor and Steel Dynamics, who also have relatively high rebar exposure also traded lower. The 50% tariff has been in place since August 2018.

Year-to-date through April, amid the elevated 50% tariff, Turkey accounted for only just above 1% of U.S. steel imports. This compares with 7%, 6%, and 3% in 2016, 2017, and 2018, respectively. However, for rebar alone, we note that Turkey accounted for 63% imports to the U.S. from 2011 to 2018. It is safe to assume that Turkish import volumes will now rise in the coming months but, with a 25% tariff still in place, they will remain well below historical levels.

It is worth noting that the press release announcing the Turkish tariff reduction substantiated the adjustment by indicating that "capacity utilization has improved at this point to approximately the target level recommended." This sets a meaningful precedent for the potential softening of the U.S. government's broader stance on steel trade if utilization remains steady or rises further. We don't anticipate any other major announcements on the steel trade front in the near-term.