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Steel Stocks Are Soaring Despite Talks to Cut Tariffs. Here’s Why.

Raw steel coils ready for production in the steel mill.

Nikola Panovic/Dreamstime.com

The U.S. and Europe are in talks to remove Trump-era steel tariffs. The potential for reduced trade barriers has the potential to ding steel-producer shares, but investors don’t appear worried Monday morning.

That wasn’t the case early in the day. Shares of United States Steel (ticker: X), Cleveland-Cliffs (CLF) as well as electric-arc furnace-based producers Steel Dynamics (STLD) and Nucor (NUE) were down about 1.5% on average in premarket trading. S&P 500 and Dow Jones Industrial Average futures, for comparison, were both down about 0.5%.

But the steel producer shares are now up in early trading, adding to year to date gains. That quartet is up more than 60% so far this year on average coming into Monday trading. Higher steel prices and more steel demand from a recovering economy are the two primary reasons steel stocks are up. And they are a much bigger deal than the impact tariffs generally have on the sector.

Tariffs have the chance to push down steel prices by lowering the cost of imports. The U.S. is short steel, and there isn’t enough domestic production to meet demand. The country has to import steel which typically makes the price paid for imported steel the price setter for the entire domestic market. Tariffs, of course, raise the price of imports by adding taxes.

Tariffs, however, don’t always determine the direction of stocks. Steel demand and the supply demand balance does a better job of that. From the middle of 2018, when the Trump administration put tariffs on European steel, to the end of 2020, U.S. Steel, Nucor, and Steel Dynamics stock dropped 54%, 20%, and 21%, respectively. The S&P 500 rose 35% over the same span.

In contrast to the underperformance of its peers, Cleveland-Cliffs stock rose 68% from the middle of 2018 to the end of 2020 as the turnaround led by Lourenco Goncalves gained traction.

European/U.S. tariffs aren’t the most significant tariffs in the steel industry. China is the world’s largest producer by far with roughly 55% of global steel-making capacity. There are still various tariffs and anti-dumping duties in place around the globe targeted at Chinese steel.

“Dumping” any products, including steel, generally refers to selling excess product in foreign market below domestic prices.

The biggest risk to steel stocks isn’t tariffs. It’s high prices. Steel prices are at multiyear highs, and any factors that drive them down, including increasing supply, have the potential to hurt the returns of steel stocks.

Write to Al Root at [email protected]

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