What happened
Shares of multiple steelmakers fell substantially on March 22. Commercial Metals Company (CMC -1.18%) had the worst day, with shares down more than 12.2% following the release of the company's second-quarter 2018 earnings results before market open. But it wasn't the only steelmaker to have a bad market day. Shares of United States Steel Corporation (X -2.32%) fell 10.7%, AK Steel Holding Corporation (AKS) fell 8.3%, Steel Dynamics, Inc. (STLD -2.29%) fell 7.5%, and Nucor Corporation (NUE -8.87%) shares fell 5.9%.
So what
While Commercial Metals reported quarterly results that were a little disappointing with both revenue and earnings a little below analyst estimates, today's big drop for the company and its peers was more influenced by two bigger pieces of news that affect the entire industry.
Image source: Getty Images.
The first piece of news relates to major tariffs the Trump Administration first announced in late February that would impose a 25% tariff on imported steel and potentially limit import levels from some countries. More recently, however, the administration started to backtrack on that position and has decided to hold off for now on tariffs on steel and aluminum from Europe, Australia, Argentina, Brazil, Canada, Mexico, and South Korea.
The second piece of news relates to the country most notably absent from the list above: China. Not only did the Trump Administration not exempt China from steel and aluminum tariffs, it raised the stakes, announcing plans to impose tariffs on even more products imported from China.
Now what
Steel investors fled on this two-pronged piece of news today. Neither is good news for the prospects of American steelmakers.
Yes, China and others almost certainly have unfairly -- and potentially illegally -- subsidized their domestic steelmakers, allowing them to undercut U.S. steel producers and drive prices down, taking market share. But the bigger threat of a looming trade war, as well as the effect of higher steel prices on a huge swath of products that Americans buy, have much greater implications that will hurt the economy. Falling steel demand could be more damaging to domestic steelmakers than any upside from pushing more Chinese steel out of the market -- if other low-price countries are able to avoid tariffs and maintain substantial share of the U.S. market.
That doesn't factor in a likely third concern for many investors -- interest rates -- which are on track to climb at a faster rate than many investors may have expected. Not only could rising rates potentially slow economic growth -- hence demand for steel -- but it would also increase costs for steelmakers, as they often carry substantial debt loads:
CMC Total Long Term Debt (Quarterly) data by YCharts.
Put it all together, and this is more evidence why investors should avoid most steelmakers. Nucor and Steel Dynamics, which have far more flexible operating models, proven capital allocators in the CEO seat, and far stronger balance sheets, may be worth looking at more closely, especially if their stocks continue to fall in the days and weeks to come.
