$200m boost for BlueScope from US tariffs
BlueScope Steel looks to be a big winner from Donald Trump’s steel tariffs, which could boost earnings by $US150 million.
BlueScope Steel looks to be a big winner from Donald Trump’s steel tariffs, which could boost earnings by $US150 million ($194m) a year or more at its Ohio steel mill, despite fears the US action could be the first step in a full-blown trade war.
The earnings boost for BlueScope is more than the entire value of Australian steel exports to the US, but has not yet flowed to the steelmaker’s share price, as investors focus on the potential for a trade war that could halve global growth.
Experts and investors say the action on steel and aluminium is likely a prelude to a bigger action against China for breaches of intellectual property rights, and moves to renegotiate some of the US’s main trade agreements.
Credit Suisse analyst Michael Slifirski yesterday forecast BlueScope’s North Star mill in Ohio could receive a $US150m earnings before interest and tax boost because of rising US steel prices.
At the same time, the impact on the company’s west coast US operations, which import Australia steel, could be negligible or positive, he said.
“The 25 per cent steel tariff measures imposed by the US should in our view underpin currently elevated US steel (prices) over the short-to-medium term, driving additional earnings growth,” Mr Slifirski said.
He estimated a $US75 a tonne increase in steel spreads — which is the difference between the steel price and the cost of raw materials — would mean a $US150m boost in earnings before interest and tax for BlueScope.
“Our steel spread assumption may yet prove to be conservative if spot hot rolled coil (steel) rises further as the market tightens on potential supply shortfalls from importers,” Mr Slifirski said.
According to the Australian Bureau of Statistics, the US was the destination for 15 per cent of Australia’s $914m of steel exports last year, representing export value of just $137m.
Analysts have predicted positive direct impacts for Australian companies such as BlueScope and Alumina from the steel and alumina tariffs.
Aluminium exporters South32 (from South Africa) and Rio Tinto (from Canada and Australia) are not expected to take significant hits, according to UBS.
But the prospect of rampant protectionism up-ending the most promising global growth outlook in years has made most investors nervous.
“I think it is just the start,” Stephen Kirchner, program director for Trade and Investment at the US Studies Centre, said.
The US International Commerce Commission has been weighing a move against China for breaches of intellectual property rights and Mr Kirchner said a decision on that action could be delivered as early as next month.
That could be a prelude to the US imposing tariffs on Chinese technology imports, but would also likely put the US offside with the World Trade Organisation, to which China was admitted in part to allow enforcement of trade disputes.
Mr Trump has previously described the WTO as a “catastrophe”, with the administration vetoing appointments to the appeal body that resolves disputes.
Mr Kirchner said the steel and aluminium tariffs could be a prelude to the US exiting or breaking away from the WTO, with the move on China providing a potential catalyst.
“I think that is basically where this will end up.”
Oxford Economics estimates a US exit from NAFTA and broadbased US tariffs of 25 per cent on China and 10 per cent on South Korea and Japan could halve global growth. “World GDP growth would slow to 2.5 per cent this year, compared to our baseline forecast of 3.2 per cent, and growth would slow further to about 1.5 per cent in 2019, about 1.5 per cent below our baseline forecast,” Oxford said.
Credit Suisse boosted its BlueScope target price by $1 per share to $16.90 because of the expected positive impact of the tariffs, representing about $500m of increased value.
BlueScope’s SteelScape business, which imports Australian steel on the west coast and processes it in the US, could also receive a positive benefit because it may be able to pass on all the costs and expand its margins.
But, illustrating broad market concerns about knock-on effects of the tariffs, BlueScope shares fell 35c or 2.1 per cent to $15.95 yesterday, more than erasing gains made on Friday when the tariffs were announced.
The ASX200 index fell 0.6 per cent yesterday.
Business Council of Australia chief executive Jennifer Westacott said the tariffs were not good for Australian businesses.
“It will hurt us and obviously the government will kind of negotiate its way through this, as they should,” Ms Westacott said.
“But the less competitive we are and the more things that happen around us, then the harder it will be for us.” Citi analysts warned investors of the growing trend toward protectionism the US is leading.
“Global businesses could be entering a protectionist regime change that may very well get punished by investors,” Citi analyst Tobias Levkovich said.
“With the US having pulled out of the Trans Pacific Partnership, and NAFTA negotiations still ongoing, the disruptions could get out of hand and that seems to be the source of renewed fears.”
Not everyone is predicting doom and gloom.
Giovanni Di Leto, a lecturer in international trade law at Monash University business school, said the trade measures could be part of a larger game for the US to renegotiate its trade agreements, particularly the NAFTA accord.
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