President Trump's decision to impose a 25% tariff on imported steel and 10% tariff on imported aluminum will impact more than just people who work in those industries. The tariff could raise prices on everything from housing to cars.
In this segment from Industry Focus: Energy, analyst Sarah Priestley is joined by Motley Fool contributor Daniel Kline to talk about Kline's real-life experience buying steel and aluminum products from China. While his example isn't directly applicable because the Trump tariffs apply to unprocessed metals, not finished materials, the pricing model sheds light on what may happen under the Trump tariffs.
In addition, the two also discuss tariffs that have worked and how the steel and aluminum industry may react.
A full transcript follows the video.
This video was recorded on March 22, 2018.
Sarah Priestley: Dan, you're more likely to be heard on our Tech and CG shows.
Dan Kline: That's true. We've never done one of these before.
Priestley: No, we haven't. But you have a personal experience, or unique insight, into the industry, because of a former life. Tell us about that.
Kline: Sure. My family owns a ladder and scaffolding company, and for four years I ran a factory and was involved in our other factories. And we made steel scaffolding in New Hampshire. And when we made a steel scaffolding frame in New Hampshire -- I'm going to round off all the numbers just to make it easy -- a typical six-foot frame might cost $100 on a wholesale basis. Maybe it cost us $65 to make it. So, we could import from China the same frame for maybe $30 and sell it for $60.
So, we would make U.S. product, but we couldn't sell any of it in the U.S. You can't walk into someplace and say, "I have something that's twice as expensive and 10% better." That's not good. We would use that in our own rental inventory. You say, "Steel is steel." Steel is not steel. The steel made in America, bought here, would hold up longer. Now, you look at it and say, with this tariff, the Chinese scaffolding frame is going to be more expensive, but not so much more expensive that it makes sense to buy the U.S. one. So, in terms of a company like my family business, my former company, they're still going to import steel, they're just going to have to charge more for it or make less money on it. So, it becomes a tax on the construction industry.
The same thing with aluminum. They still make aluminum stages, all different sizes. You'd have to place your order for them to sit on this aluminum, not knowing what size you'd want to cut it too, so it made sense to buy that in the U.S. because changing demand, you had a little bit of pricing flexibility based on how quickly you could get it out. But if somebody said, I need 1007 foot scaffold planks three months from now, you might be able to order the same thing in China and just make more money on it. So, you're going to see that the prices go up, and it's not the ladder company that's going to make more money, it's the aluminum companies and the steel companies.
Priestley: And you're already starting to see steel futures up about 7% this year. I think it's important to note, this tariff particularly, I think it deals with unfinished products. But, you're right, construction, like construction rebar, things that people don't think about that go into making these huge complexes that we're starting to see go up in urban areas, reurbanization is huge, there's so much building going on. For a normal family house, you're probably talking 1% or 0.5% of steel content. For these big sky rises, it's a huge percentage increase.
Kline: It's like we talked about earlier with cars. It's going to hit you so many places where you're not aware of it. I don't think you walk through the city and think, "That's made of steel. That's made of aluminum." That's not how people process. But, these are going to be direct increases. And with what you talked about with investment before, if the steel industry was coming out and saying, "We going to spend the next year modernizing our factories, doing everything we can to take cost out of producing steel," then this might make sense. But, as we've seen with the tax cuts, most of the extra money they make will get returned to shareholders. It's not going to workers and it's not going to modernization. I know I'm speaking very broadly, but I have not seen any pledges for that type of thing to be happening.
Priestley: Not within this industry. We've definitely seen some of the techs giving thousand-dollar bonuses to --
Kline: Yeah, but those are smoke screens. I read the earnings reports for all of the various retailers, and they're reporting pretty significant -- Sears, which would have lost $600 million, made money last quarter because of the tax change. OK, they just needed to keep the lights on. But Walmart giving workers a $1 raise is really just so they don't look too evil in keeping all the money from this.
Priestley: So, we want to kind of have a balanced discussion on this because there's so much negativity out there, so we're going to want to talk about a couple of tariffs that have worked, one most notably being Harley-Davidson in the early 80s. They were facing really tough competition from cheap Japanese imports. Reagan enacted a really swift and very focused tariff, 49% falling to 4% over five years. And this essentially gave Harley-Davidson time to reorganize and improve efficiency. If you translated this to the steel industry, the big-ticket item to watch is their capacity utilization. They could improve capacity utilization. I think it's already up over the last year by about 4%. We could start to see those efficiency gains.
Kline: That's certainly what you hope happens, and that this is just a stall tactic, because the last thing we want to see in the United States is us lose the capacity to create things that we need. That obviously becomes an issue in times of political strife and war. So, propping these industries up does make sense, as long as that's what they do. And the examples of tariffs working are all tied to companies that needed breathing room, as you said earlier. Here, I'm not sure any of that was thought out. Hopefully the industry will take it as what it is and realize that this is not a forever tax.
Priestley: Yes, it's an opportunity, essentially. And the thing is, as soon as you mention protectionist measures, people get very angry. But, the thing is, they are enacted across the world, and we probably don't even realize it. American farmers exporting to the E.U. face a 14% tariff. That's 3X what it is in reverse.
Kline: We were actually, on the writing side of things, looking at doing, "These are the tariffs that are in effect now."
Priestley: That you don't even know about, yeah.
Kline: It's so big that you can't even penetrate the list. Down to very specific things, like, we've talked about before, you cannot import chocolate from England.
Priestley: Which is such a shame.
Kline: Finished Cadbury, you have to make it here. It is such a shame. It's a protectionism measure to keep the factories here going. And it's a different recipe, and yes, it's much better in England. But, there's tariffs in all sorts of areas. But, this is very public, and what you have to worry about is reprisal.