During the recent presidential election, Donald Trump promised to slap tariffs on any nations seen to be unfairly impacting domestic producers. And he’s now made good on that threat.
While details will likely be finalized next week, President Trump on Thursday announced the imposition of a 25 percent import tariff on steel and a 10 percent tariff on aluminum.
It is also possible the U.S. Commerce Department will move to cap steel imports at 21 million tons per year. That would be a clear boon to U.S. steel makers such as U.S. Steel (X), AK Steel (AKS), Nucor (NUE), and Steel Dynamics (STLD). These domestic steel makers would suddenly find a 13 million-ton gap to be filled to match supply and demand, according to Merrill Lynch.
And these steel makers also happen to be portfolio holdings in the lone pure-play exchange-traded fund focused on this industry, the VanEck Vectors Steel ETF (SLX). That fund carries a 0.55 percent expense ratio and has about $180 million in assets.
SLX has taken investors on an adventurous ride through the years. According to Morningstar, it lost a whopping 63.7 percent in 2008 followed by a supercharged bounce back of 112.5 percent in 2009. More recently, the fund lost 26.3 percent and 42 percent in 2014 and 2015, respectively, followed by another outsized gain—95.8 percent—in 2016. It gained 24.5 percent last year, and after a 1.14 percent pop in price on Thursday on the heels of the tariffs announcement, it was up 8.5 percent year-to-date.
In short, SLX isn't a classic buy-and-hold fund. But right now it seems to have some favorable winds blowing in its favor.
Odd Timing
The timing of the Trump tariffs is curious because the domestic steel producers face a better outlook than they have had for a while. In fact, both supply and demand have been fueling a brighter industry outlook in recent quarters.
For example, the flow of imported steel onto our shores had already begun to wane in recent years. That’s due in part to pressures on Chinese steel producers to sharply curtail output of steel as that nation focuses on less carbon-intensive industries. In the Chinese region of Hebei, which accounts for 25 percent of China’s steel output, producers have been forced to cut supply by 50 percent in a bid to help clear out the polluted air in country’s northern regions. Those restrictions, which were set to expire in March, may be extended into late spring.
And it helps that the U.S. dollar has slid roughly 13 percent since the start of 2017. That effectively boosts the price of imports and the competitiveness of domestic producers. As imports have fallen, domestic producers have been taking back lost market share and making greater use of their factories. Producers of sheet steel, for example, are operating at 85% of industry capacity. That’s typically a utilization rate that provides for firming pricing power.