My Foolish colleagues have been nearly unanimous in their bullishness on Nucor Corporation (NUE +0.13%) in recent months. There's certainly a lot to like about North America's most diversified steel and steel products company. It just delivered its most profitable first-half since the Great Recession, and seems to perform well in any market. In fact, it often emerges from down cycles stronger than its peers, which has built it a considerable market advantage.
That said, there's one thing on the horizon that could weigh heavily on the stock's performance in the year ahead, something that is completely new territory for investors: trade policy. While the entire American steel industry has lobbied for stronger protections from international (and often state-sponsored) competitors for decades, only now do they have the ear of a protectionist president. That's why trade policy could end up having the most consequential impact on the where Nucor Corporation stock will be one year from now.
Image source: Getty Images.
The murky outlook for trade policy
Nucor Corporation has a formidable business by any standard, which has been aided in no small part by a handful of major acquisitions in recent years.
|
Metric |
Value |
|---|---|
|
Steel mills production |
21.3 million tons |
|
Facilities |
Over 200 |
|
Total revenue, 2016 |
$16.2 billion |
|
Total net income, 2016 |
$796 million |
|
Cash and short-term investments, July 1st 2017 |
$1.56 billion |
|
Fortune 500 Rank, 2016 |
170 |
Source: Company presentation.
That means the company stands to be a major winner or loser from any new trade policy concerning the American steel industry. While it could take years for the dust to settle on the longer-term impacts of such policies, Mr. Market seems to enjoy making knee jerk reactions before having all of the facts. That's important considering the Trump Administration will work with Congress in the coming months to enact its first full-year budget for the federal government's next fiscal year, which begins October 1.
What do investors know right now about how changes to trade policy might shake out? Interestingly, it's probably not what you think.
While President Trump campaigned as a candidate on a "Buy American" pledge, and even led a "Made in America" week at the White House recently, the most recent proposed changes to the fiscal 2018 budget actually reduce the protection provided to the American steel industry. Worse yet for an industry that has pinned renewed hopes on the new president, the changes have been led by Republican representatives in the House.
More specifically, the fiscal 2018 budget for the Interior Department, as currently written, relaxes Buy American provisions that have long been part of domestic economic policy. The provisions proposed to be changed are those that require water infrastructure projects funded by federal tax dollars -- which is most of them -- to use American made iron and steel. If it becomes law, such projects would be allowed to use steel that is poured and melted offshore and only finished and rolled in the United States.
That could have an impact on American iron and steel producers, which are still producing at just 93% of 2012 levels.
US Industrial Production: Iron and Steel Products data by YCharts
The American steel industry immediately raised the issue with politicians once it was discovered, but whether or not changes are made to the budget that becomes law remains to be seen. Either way, it shows the divergence of what President Trump says publicly and what Congress seems willing to do. That could lead to a volatile ride in the months ahead if the spat spills out into the public view -- and changes to trade policy may just be getting started.
President Trump has promised to protect the American steel industry by enacting tariffs and/or quotas on steel imports by citing national security interests, despite a warning from leading economists, including 15 former Chairs of the President's Council of Economic Advisers.
On one hand, a tariff rate quota could be a way to enable certain international producers to continue supplying the American market, perhaps even building or strengthening diplomatic ties. It should also increase prices for domestic producers and grow the market opportunity for them. That would be good news for Nucor Corporation, especially considering it's one of the best-positioned steel producers on the continent.
On the other hand, imposing tariffs and/or quotas could lead to a devastating trade war with all the wrong countries. For instance, while Chinese steel led to the demise of the American steel industry in the 1970s and 1980s, perhaps nowhere as strongly as in my hometown of Pittsburgh, today only 3% of all steel imported by Uncle Sam comes from China.
If American politicians make such a move, then it's highly likely to be contested by affected countries through the World Trade Organization -- and the United States isn't likely to win. As the world awaits the decision, what happens to steel stocks is anyone's guess. But projections for huge employment losses, and the cloud of uncertainty, may not provide the boost investors expect.
What does it mean for investors?
Despite the tough talk on protecting American manufacturing from both politicians and the steel industry itself, Nucor Corporation stock is likely better off if the status quo remains in place for the year ahead. The policies proposed or floated in the first six months of the Trump administration or more likely to hurt the industry, especially through volatility fed by uncertainty.
That said, there may be several smart trade policies that can be enacted that would help ensure the strength and growth of American steel, but so far investors haven't seen much promise. Either way, if trade policy becomes a hot-button issue in the next several months as Congress begins negotiating the fiscal 2018 budget, then investors could face quite a roller coaster ride.
