Last week, President Trump formally declared a trade war against America’s biggest trading partners. He did this by slapping 25% tariffs on steel and aluminum imports from China, Japan, Europe, Mexico and Canada. This is pretty much all of the United State’s top trading partners.
The response has been swift and forceful:
- The European Union (EU) hit back with $7.5 billion of levies on U.S. exports. These tariffs will include motorcycles, denim, cigarettes, cranberry juice, and peanut butter. The EU will also launch a case against American measures at the World Trade Organization.
- Canada announced punitive measures with 25% tariff on steel imports from the United States and a 10% tariff on aluminum. It will also impose duties on other goods including playing cards, inflatable boats, yogurt and toilet papers. The total value of American goods subject to the tariff is $12.8 billion and will be effective from July 1st.
- Mexico plans to retaliate by targeting products from congressional districts that the Republican Party is fighting to retain in November elections. In addition, it would impose levies on a wide range of U.S. goods, some steel and pipe products, lamps, berries, grapes, apples, cold cuts, pork chops and various cheese products.
Unfortunately, this trade war won’t end here. President Trump has already pushed forward the idea of slapping tariffs on German luxury cars. Moreover, the US government is getting ready to implement 25% tariffs on $50 billion worth of Chinese goods.
Accordingly, it’s only reasonable to expect that China and the European Union will retaliate with tariffs of their own. Additionally, the timing of these tariffs threatens to derail the ongoing North American Free Trade Agreement (NAFTA) renegotiations.
Numerous trade wars are now in full swing. There will be some winners and many losers as the economic effects of a trade war become apparent.
In the short term, the biggest winner will be the steel industry. The 25% tariffs on steel imports will create vast new product demand for US steel producers.
Low cost, high-quality steel producer Nucor to profit from the trade war
Nucor (NYSE-NUE) is one of America’s lowest cost and most profitable steel producers. The well-managed company pulls this off due to a number of substantial advantages.
First, Nucor has a unique pay structure where two−thirds of all employee pay is dependent on performance. Unlike other big steel companies plagued by featherbedding labor unions, this arrangement ensures labor and management pull in the same direction.
Second, Nucor uses electric-arc furnaces to manufacture its steel. These furnaces are low cost because America’s abundance of cheap shale gas has greatly reduced the cost of electricity (and Nucor‘s operations).
Another advantage of electric-arc furnaces is that they make it easy to ramp production up and down according to demand. This gives Nucor added flexibility in controlling costs that its competitors don’t have. That’s because many of their competitors use blast furnaces which, once started, have to run 24/7. And if turned off, they take a lot of time to start up again.
These are the reasons Nucor‘s profit margins are among the highest in the industry. Indeed, Nucor has made money every year since 2010 — while giant US Steel has lost money seven out of the last eight years.
Nucor‘s operational excellence has translated into excellent financial results last year:
- Revenues grew 24.9% year-on-year to $20.25 billion;
- Profits rose 65.6% year-on-year to $1.3 billion;
- Debt declined 17.9% year-on-year to a manageable $689 million.
The company was able to achieve all of this without the benefit of steel tariffs against its competitors. Nucor is going to do even better as steel demand surges as steel tariffs are implemented.