What happened
Shares of AK Steel (AKS) closed 14% higher on Friday after it was reported that the U.S. Commerce Department, in the person of U.S. Secretary of Commerce Wilbur Ross, had recommended that President Trump grant "broad based relief" to U.S. steelmakers struggling with unfair competition from overseas.
So what
Secretary Ross reportedly recommended that the President consider imposing one of the following:
- A global tariff of "at least 24%" on all steel imports into the U.S.
- At least a 53% tariff on imports of steel from Brazil, China, Costa Rica, Egypt, India, Malaysia, Republic of Korea, Russia, South Africa, Thailand, Turkey, and Vietnam, combined with the simultaneous imposition of a quota capping steel imports from other countries at their 2017 levels.
- A quota capping imports of steel from all countries at 63% of their 2017 levels.
The goal of these measures, whichever one is chosen, will be to increase U.S. steel production capacity to a level sufficient to ensure the long-term viability of the industry. In the Secretary's opinion, this will require increasing utilization from the present rate of 73% industrywide to approximately 80%.
All of sudden, steel stocks are red hot. Image source: Getty Images.
Now what
That's the goal. The immediate effect of the protective measures -- again, regardless of which one is chosen -- will be to decrease the supply of cheap steel entering the U.S. market from abroad and permit U.S. producers such as AK to increase both production and prices. That should mean a quick boost to both revenues and profits.
With AK Steel currently eking out only a 0.2% profit margin (or worse) on its product, it's obviously a good effect from AK Steel's perspective. It also explains why the shares soared in response to Friday's news.
