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Trade deal with Canada, Mexico to benefit US economy, hurt steelmakers

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Trade deal with Canada, Mexico to benefit US economy, hurt steelmakers

The new trade deal struck by the U.S., Mexico, and Canada is positive for the U.S. economy, but analysts said it will be unfavorable for domestic steelmakers.

Moody's said in a note that the development is credit negative for U.S. producers, with the move leading to greater U.S. steel and aluminum imports, lower domestic steel prices as well as weaker cashflow generation.

In recent months, U.S. steel and aluminum prices have suffered, primarily due to concerns over capacity restarts and expansion projects, potential removal of Section 232 tariffs and quotas, lower scrap prices and apprehension over weakening global economic growth.

The removal of tariffs on Canadian and Mexican steel and aluminum products, as well as the lowering of Turkish import tariffs to 25% from 50%, is expected to trigger an import influx later this year.

Canada and Mexico producers stand to increase their market share of imports into the U.S., with quotas remaining imposed on other countries, including China. In 2018, imports from Canada and Mexico totaled 9.1 million tonnes — representing 30% of imported steel into the U.S., against 8.8 Mt — or 26% share of imports — in 2017.

Primary beneficiaries of the tariff removal are manufacturing sectors that use the commodities, especially the vulnerable heavy manufacturing sector, Moody's said. In addition, tariff removal will boost investment in capital goods.

Data from Panjiva, meanwhile, showed that companies covered by retaliatory duties will stand as the main beneficiaries of the new trade deal — dubbed the USMCA agreement — in the near term. Mexican imports of metals and nonmetals products fell 8.7% yearly in the first three months of the year, while the country's exports dropped 9.5% yearly.

Previously, BMO Capital Markets researchers said in April that the impact of the trilateral trade deal would be "modest" on the U.S. economy, as it largely reincentivizes vehicle production and increasing agricultural sales, primarily dairy products to Canada.

Ratification of the trade agreement in the U.S., however, remains to be seen in a Democratic-controlled House of Representatives, with a report by the Peterson Institute for International Economics, a think tank, showing that approval will hinge primarily on the economic benefit that each congressional district derives from the trade deal.

Among the districts standing to benefit from the new trade deal with Mexico and Canada include those in Texas, Michigan, Illinois, California, Vermont, Washington, and Arizona.

The conciliatory tone to Mexico and Canada by the Trump administration is a stark contrast to its position against China, a May 21 analysis by law firm Osler Hoskin & Harcourt suggested. The U.S. is aiming to more than double the current 10% tariff rate to 25% on US$200 billion of Chinese imports, with tariffs possibly extended to all products exported from the Asian nation to the U.S.

Panjiva is a business line of S&P Global Market Intelligence, a division of S&P Global Inc.