Tenaris SA, the Luxembourg-based steel pipes manufacturer, could see significant cost reduction that would boost the company's earnings and free cash flow now that the U.S., Canada and Mexico have reached an agreement that removes a 25% tariff on steel imports, analysts said.
The U.S. and Canada in a joint statement on May 17 said the U.S. intends to lift tariffs on aluminum and steel and Canada will remove tariffs levied on American goods in retaliation for the steel and aluminum duties. A similar deal with Mexico was confirmed in a statement by the Office of the U.S. Trade Representative. The agreements pave the way for the countries to approve the United States-Mexico-Canada Agreement, or USMCA, the Trump administration's update of the North American Free Trade Agreement.
Importing finished tubular steel from Mexico and other countries in order to serve the U.S. market costs Tenaris C$145 million annually, Bernstein analysts said in a May 16 note.
"We understand the majority of these imports are seamless [oil country tubular goods, or OCTGs] from their Veracruz facility, with limited welded OCTG imports. We also understand that Mexico and Canada make up the majority of the tariff-bearing imports, with minor imports coming from other parts of the world," Bernstein lead analyst Nicholas Green said.
About 85% to 90% of the tariff charges come from Mexico and Canada, according to Tenaris. Ahead of the announcement, Bernstein analysts estimated Tenaris could see a $130 million, or 7%, increase in the $1.9 billion consensus EBITDA for 2020 if the USMCA is approved without tariffs. That estimate does not include $40 million in tariffs that Tenaris would have to pay on the import of steel billet from Mexico were it not under a volume-bound exemption, which is expected to expire in late 2019.
The agreement also stipulates that Canada and the U.S. can request consultation should aluminum and steel imports surge over "historic volumes." If that occurs, the agreement states either country can impose 25% and 10% duties on steel and aluminum, respectively. Retaliatory measures, should they come, must only hit back at the same sector.
"[As] one of the leading producers of seamless tubular steel in Mexico, we would expect the majority of Tenaris's imports to be covered by a quota system (as is the case in Argentina, where they are also the leading OCTG producer)," Green said.
Even if these benefits do not extend to the full $130 million, a positive impact to EBITDA and cash flow is still anticipated, he said. Depending upon the level of quotas, the benefit could be around $100 million.
Tenaris on May 2 reported a first-quarter net income of $242.6 million, up 3% from the $235.2 million reported for the same quarter in 2018. Free cash flow for the quarter was reported at $461.9 million compared to the negative free cash flow of $121.5 million posted for the corresponding period a year prior.