1 Reason China's Steel Just Melted

Today, the U.S. steel industry is celebrating a significant victory in its ongoing trade tiffs with China. The World Trade Organization, or WTO, ruled yesterday that the U.S. has not been unfairly subsidizing "grain-oriented electric steel" exports to the Big Dragon, and barred China from slapping import taxes on the metal. This decision directly affects two American companies, but the WTO's decision could have significant and far-reaching effects for entire sector in the years to come.

Birthday boys
Grain-oriented electric steel, or GOES, is not your everyday bike lock steel. This specialty material is used to make high-efficiency transformers, electric motors, and generators. The two key players in this field are ATI Allegheny Lundlum (NYSE: ATI  ) and AK Steel Holding (NYSE: AKS  ) .

In ATI's most recent quarterly report, the company states that high-value product sales (including GOES) account for 78% of its revenue, although GOES shipments suffered significantly over the past year. In 2011, ATI made 65% of its sales domestically, while China accounted for around 5% of total sales.  

AK Steel makes specific note of China's import taxes on its products, and cites it as one of the main reasons for the company's international electric steel sales declines. In 2008, AK's electric steel production capacity was 335,000 tons. As of Q3 2012, it's down to 285,000 tons, an 18% reduction. 

Despite the capacity squeeze and China's tariff, AK notes that GOES sales increased across South Asia, the Middle East, and North Africa. Unlike ATI, the U.S. makes up 86% of all sales, a number that has only grown in the past few years. 

Metal mania
The Chinese Commerce Ministry released a statement today saying that it will "handle this case according to WTO regulations," so what does this mean for ATI and AK Steel? According to the latter, tariffs added about 19.5% to its GOES price tag. If the same is true for ATI, both companies will be able to call up their Chinese buyers and let them know they could be paying almost 20% less for their American steel. Now that's a wheel of a steel steal.

Generally speaking, unfair trade advantages and tariffs are seen as a hindrance to economic development. Over the past year, China has announced a series of stimulus packages meant to jump-start its economy. This newest tariff removal is another bright sign for both public infrastructure and private businesses in China.

With more positive steel news, it's easy for investors to think that coal companies like Cliffs Natural Resources (NYSE: CLF  ) , Peabody Energy (NYSE: BTU  ) , Alpha Natural Resources (NYSE: ANR  ) , and Arch Coal (NYSE: ACI  ) will see a boost in metallurgical coal demand. Whereas before today it mattered whether these companies sold coal domestically or in China, this price-leveling means that coal plants in both countries are capable of meeting new demand.

But if you think this newest ruling will fire up the forgeries, think again. America-to-China specialty steel trade accounts for only around $250 million annually, and specialty steel would need to see a huge spike to move the needle for these coal companies.

It's a wide world
WTO's ruling could create lucrative precedent for other sectors of America's economy. China first slapped tariffs on GOES in June 2009, meaning it took over three years for the WTO to recover and respond to China.

If this ruling serves as a precedent for other trade tiffs, we could see the $12 billion 2011 auto parts debacle settled in record time. The U.S. and China are extremely important trading partners, and settlement of disputes is necessary to maintain equal (and hopefully amicable) relations. In 2011 alone, the U.S. exported $103 billion of goods to China and imported $399 billion from it. 

Investors looking to analyze trade agreements have a lot to learn from Newton's third law of motion: for every action, there is an equal and opposite reaction. China lost a three-year battle yesterday, but the trade war is far from over.

China's no stranger to market manipulation, and many investors think its shortcutting is about to hit home hard. But fear not, because the future is made in America. Domestic manufacturing is poised to once again become the investment driver of the world, and all because of one disruptive technology. You can uncover the three companies that will become the American Steel of tomorrow in our analysts' new free report. Just click here to read more.

Justin Loiseau has no positions in the stocks mentioned above. You can follow him on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo.

The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On October 20, 2012, at 1:36 PM, buck1451 wrote:

    This is a prime example of what is wrong with internet analysts, and why investors should do their own research. This posting links specialty steel sales to coal consumption, concluding that an increase in specialty sales will not be large enough to move the needle on coal stocks. What the author fails to comprehend is that domestically made specialty steel is melted from scrap and does not use metalurgical coal at all. The only way coil would be involved in its production is if thermal coal was used to make the electricity needed to melt the scrap.

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