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Trump tariffs: Should you sell your mining stocks?

Glenn Freeman  |  23 Mar 2018Text size  Decrease  Increase  |  
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Global share markets endured a bumpy ride in the last couple of weeks, as US President Donald Trump's 8 March announcement of aluminium and steel trade tariffs rocked mining stocks.

His later clarification that Canada, Mexico--and probably Australia--would be exempt brought some relief, "but details of when they would be granted were think," reported AAP.

"This is something that bites less than what the rhetoric was last week," Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana, told the newswire.

"It's a softer play on the idea than the original 'sky was falling' reaction last week when it sounded like it was going to be across the board, no ifs, ands or buts, and everybody was just going to get hammered," he said.

In the immediate aftermath of the news that trickled from the White House, the S&P 500 had zig-zagged in a tight range between positive and negative territory as investors were uncertain about what Trump would say, AAP reported.

"Worries that the tariffs would ignite a global trade war have dominated markets since he announced the tariff plan last Thursday, and the exit of chief economic adviser Gary Cohn late Tuesday intensified the concerns."

They stumble that run fast

Morningstar's head of equities research, Peter Warnes, invoked The Bard himself in analysing the situation: "wisely and slow; they stumble that run fast".

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"Wasting no time, [Trump] took only 13 days (including two weekends) and just for good measure increased the tariffs by 25 per cent and 10 per cent respectively [for steel and aluminium imports]," Warnes says.

"Whether this is the first shot in a global trade war is a moot point. But it has placed the world's trading nations on alert.

"The protection 'for a long time' suggests President Trump is in for the long haul and retaliation in some form, whether financial or trade related, is likely. The direct implications on China, the country with the largest trade surplus with the US, of the increased tariffs on steel and aluminium imports are minor."

While China is the 10th largest steel exporter to the US, its allies Canada and South Korea are not so fortunate. Warnes believes at least secondary retaliation--rather than primary--is possible "should cheap imports of steel and aluminium find their way into other countries from a spill-over effect".

From China, this retaliation conuld include switchint aircraft purchases from Boeing to Airbus. Morningstar's Chicago-based aviation analyst estimates a switch to Airbus could endanger as much as 25 per cent of Boeing's future deliveries--possibly even more.

Warnes says Trump has "declared war on the US trade deficit, which widened to US$ 566 billion in 2017". While he notes negative net exports are a drag on GDP growth, this is more than offset by positives. "Heightened protectionism can support inefficiency and reduce productivity (the Trump put) and is not in the best long-term interests of a country."

Peter Warnes' full commentary in the Your Money Weekly newsletter is available to Morningstar Premium subscribers.

Alumina Limited

In terms of specific Australian companies that are most exposed, both BlueScope Steel (ASX: BSL) and Alumina (ASX: AWC) are rated "sell" by Morningstar--though this was the case well before Trump's tariffs were announced.

"Although Trump had initially indicated that the tariffs would be applied in a blanket fashion across all trade partners, the final proclamation is consistent with our outlook that the final form would include exemptions," says Chicago-based analyst Andrew Lane.

"Fair value estimates for the steel and aluminium companies we cover are unchanged. Future adjustments to our price deck would be required if other major steel or aluminium trade partners receive tariff exemptions.

"We reiterate the importance of taking a long-term view. Tariffs aside, we continue to forecast materially lower steel and aluminium prices over the long term, driven by decelerating Chinese gross capital formation growth, sustained global overcapacity, and faltering cost support from declining raw material prices," Lane says.

Bluescope Steel

In his latest research report on Bluescope, Morningstar's Sydney-based analyst Mat Hodge--issued before Trump's initial tariff announcement--says Morningstar's updated FVE "reflects our expectation for targeted tariffs rather than a blanket tariff or quota."

"We now expect US steel prices to sustain a wider spread above world export prices…[and] maintain a bearish outlook for global steel prices due to our below-consensus outlook for Chinese fixed-asset investment and our expectation that structural overcapacity will persist on a global scale," Hodge says.

He believes the shares are overvalued--trading at $15.88 against a FVE of $7.70--"with the market too optimistic about the ability to sustain margin improvement. Expect competitors to increasingly compete with value-added products".

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Glenn Freeman is a senior editor at Morningstar.

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