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Trump puts steel at the heart of industrial policy

In June, speaking at a former steelworks in western Pennsylvania that now processes scrap aluminium, Donald Trump promised a bright future for US steel if he became president.

“It will be American steel that will fortify American’s crumbling bridges. It will be American steel that sends our skyscrapers soaring into the sky,” he said. “We are going to put American-produced steel back into the backbone of our country.”

Like the voters who delivered Rust Belt states such as Pennsylvania and Ohio for Mr Trump, investors took him at his word.

Nucor, United States Steel and AK Steel, the three largest US steel-makers, were among the biggest stock market gainers the day after the election, and their upswing has lasted. Since election day, shares in Nucor are up by 24 per cent, while US Steel is up 61 per cent and AK is up 64 per cent.

“Trump was very vocal about how he was going to fight for jobs in the steel industry,” says Jorge Beristain, an analyst at Deutsche Bank. “The election was the signal for the market to reassess its view of the sector.”

Realising Mr Trump’s vision of an American steel renaissance will not be easy, however.

© FT Graphic / Noun project

There are four main policies that he can pursue to boost the steel industry. The easiest to achieve will be deregulation. The executive branch sets and implements federal regulations, and if Mr Trump needs legislation to accomplish his objectives he can expect support from a Republican-controlled Congress.

Such deregulation would be welcomed by steelmakers, but the scale of the potential benefits is unclear. Mr Beristain suggests cutting red tape would be helpful, but only “at the margin”.

The second option is cutting corporate taxes, which is one of Mr Trump’s stated objectives and would also likely win support in Congress. Tax cuts would help if they lead to faster growth, but the direct benefit for steelmakers would be limited, as they often do not pay much tax. US Steel and AK Steel have not taken any corporate income tax charges so far this year.

The third policy is the $1tn investment in US infrastructure that Mr Trump has made one of his signature proposals. His ambitions to rebuild highways, bridges, tunnels and airports could boost demand, especially for the long products made by “mini-mill” operators Nucor and Steel Dynamics.

Assuming $100bn of increased infrastructure expenditure per year, Jefferies estimates a 6 per cent increase in US steel consumption.

That proposal will require legislation, however, and Republican leaders in Congress have made it clear they would oppose a plan that involves a large slug of additional government spending.

Mr Trump’s campaign team has suggested the investment would come from the private sector, incentivised by tax credits, but economists have queried how much new infrastructure such a programme would deliver.

That leaves the fourth and probably most significant action Mr Trump could take: blocking imports of low-priced steel, particularly from China.

As the world’s biggest steel producer, China casts a huge shadow over the global industry, accounting for almost half of the 1.6bn tonnes churned out worldwide last year.

“Every developed region in the world has had to face overcapacity in steel production,” says Michelle Applebaum of Steel Market Intelligence.

“Most of the world has addressed it, but they still have a major problem in China.”

China’s exports have soared as its economic growth has cooled, compounding a global glut that triggered a price plunge last year, and wreaking havoc on steelmakers from Australia to the UK.

In the US, the market share taken by imports rose to a new record high of 29.1 per cent in 2015, up from 20.9 per cent in 2010.

Tom Gibson, president of the American Iron and Steel Institute, the industry group, says he plans to work with the administration “to ensure a level playing field for the steel industry”.

The appointment of Dan DiMicco, chief executive of Nucor until 2012, as the head of Mr Trump’s transition team for the US Trade Representative’s office is an encouraging sign for those hopes.

Mr DiMicco wrote in the Charlotte Observer newspaper in August that under a Trump administration “any country that continues to use unfair trade practices to steal American jobs and intellectual property will face stiff, defensive tariffs”.

However, the Obama administration has already been quite active in fighting imports of subsidised foreign steel. The commerce department brought anti-dumping and counter-subsidy actions against Chinese stainless steel plate this year and cold rolled sheet last year.

Imports from other countries, including Russia, South Korea, Brazil and Turkey, have also been targeted.

Mr Trump’s administration could do more, but attempts at aggressive action could run into legal obstacles, including those imposed by US membership of the World Trade Organisation.

And not every member of the new administration seems enthusiastic about putting up barriers to trade. Wilbur Ross, the private equity mogul who is Mr Trump’s pick for commerce secretary, suggested in a TV interview last week that new tariffs should be a last resort.

“Tariffs are part of the negotiation,” he told CNBC. “The real trick is going to be [to] increase American exports.”

Nevertheless, standing up for the US steel industry was such a central feature of Mr Trump’s campaign that he seems certain to take some action.

The result, says Renate Cakule of Wood Mackenzie, the research firm, is likely to be higher prices. “Consumers will have to pay up,” she says.

More protection for US steelmakers also means less of a premium for efficiency. Nucor, which turns scrap into usable steel in electric-arc furnaces, is a low-cost producer, but its earnings are likely to benefit less from any rise in prices engineered by Mr Trump than companies that use more traditional blast furnaces with higher fixed costs such as US Steel.

By blunting the incentives to become more efficient, increased protection may weaken the industry in the long run, Ms Cakule says. “You need to become more competitive, because when the real world catches up with you, you need to be ready,” she says.

Via FT