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US steel, aluminum sectors set to suffer after tariffs deal

The U.S. steel and aluminum sectors could face fresh headwinds in lower metal prices and increasing imports after the U.S., Canada and Mexico agreed to drop tariffs on the metals, analysts say.

"This is an unfavorable development for the U.S. domestic steel manufacturers and is credit negative for all producers, because it will lead to greater imports, lower domestic steel prices, and weaker cash-flow generation," Moody's analysts Michael Corelli and Brian Oak said in a May 20 note.

Deutsche Bank analysts said the Midwest premium, a gauge of U.S. aluminum prices, could fall substantially given the agreement, hurting domestic operations. "We anticipate the Midwest regional aluminum premium could decline as much as US$100/t, or roughly half the increase which occurred during 2018," the team said in a May 20 note.

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Citing national security concerns, the U.S. slapped 25% and 10% tariffs on steel and aluminum imports, respectively, in March 2018. Canada and Mexico responded in kind with a series of tariffs largely targeting U.S. steel and aluminum products.

Meanwhile, U.S. imports of aluminum and steel may rise without the tariffs in place, analysts said. "These import totals are likely to climb, since the tariffs and quotas will remain in place against other countries and provide a competitive advantage to Canadian and Mexican steel producers," Moody's said, commenting on the steel sector.

Still, the U.S. steel sector is also expected to benefit from the removal of tariffs in Canada and Mexico. Canada is a key steel customer for the U.S., which Moody's noted accounted for 4.7 million tonnes of U.S. steel sales in 2017 and 3.9 million tonnes in 2018.

Weighing the impact on certain aluminum producers, Deutsche Bank analysts said Alcoa Corp., which has large operations in the U.S. and Canada, would come out unscathed while Century Aluminum Co. is expected to take a hit to profits. The analysts estimated a net impact of US$10 million on Alcoa's estimated annual EBITDA. For Century Aluminum, the team outlined an impact of US$58 million on the company's estimated EBITDA, assuming a US$100/t drop in the Midwest premium.

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New enforcement tools

Canadian metal producers, which depend on the U.S. as a major customer, were jubilant about the tariff-dropping agreement.

"We believe Christmas came early in May," said Catherine Cobden, president of the Canadian Steel Producers Association, in an interview.

Aluminum associations in North America also hailed the decision. In a joint statement, the Aluminum Association in the U.S., the Aluminum Association of Canada and Imedal in Mexico called it a "major win" that will boost growth.

In a more muted response, the Steel Manufacturers Association, which has strongly supported tariffs, focused on the need for continued enforcement on imports. "The administration's comprehensive 232 actions are working," said Philip Bell, president of the Steel Manufacturers Association, in a May 17 statement. "It is important that this resolution maintains strong enforcement measures, as to not undermine the advances made by domestic steel producers during this short period of relief."

The agreement, as it cut tariffs, also paves the way for new monitoring and enforcement of steel and aluminum imports. Canada and the U.S. said May 17 that they agreed to work on "effective measures" to prevent imports of "unfairly" subsidized aluminum and steel. They also agreed to create a monitoring system that would scrutinize potential import surges and allow for tariffs to go back in place, after consultations, on individual products.

In the focus on steel and aluminum from outside North America, the industry groups liked what they saw. Some in the steel and aluminum sectors blame overproduction in countries like China as muting prices and flooding the market with too much product.

"From my vantage point, that's a huge step forward on addressing the overcapacity issue," Cobden said. The aluminum associations echoed that view in their joint statement.