A year's worth of tariffs have given a shot in the arm to the US steel industry — but not for their shareholders.
Although the nation's steelmakers have benefited from reduced competition, their stocks have plummeted in the year since the Trump administration first signaled that tariffs were coming.
Shares of US Steel are down 70% since their March 2018 peak. Nucor, the largest steelmaker in the country, is down 25% over the same period.
The stocks' march lower will probably continue. Analysts have been cutting their price targets and recommendations on steel stocks this month, even before the Trump administration announced Friday that it would lift the tariffs against steel imports from Canada and Mexico, two major sources for imported steel.
Despite the tariffs, American steel companies' stock prices have tumbled for complex reasons.
Only a short-term gain
The tariffs provided some positives for the industry, such as a drop in low-priced imports and increased profits.
Steel customers worried about how much the tariffs would hurt their supply, so they went on a buying binge early in 2018. That drove up prices.
But last year's large rise in steel prices proved to be short-lived. The supply problems never actually took place. Customers started working off their stockpiles, which cut into overall purchases.
Slowdowns in the auto, energy and construction sector also hurt demand.
Flooding the zone with steel
The price spike early last year prompted steelmakers to increase output. Steel mills reopened, adding about 9,000 jobs to the industry. Existing mills also increased their output.
Production from domestic steel mills rose by 1 million tons in the first quarter of this year compared to the same period last year, before the tariffs took effect, according to the American Iron and Steel Institute, the industry trade group.
But they made way too much steel. The increased production far outpaced the drop in steel imports, which fell by only a half-million tons in the first quarter.
Prices for rolls of sheets of steel, a higher-priced product used in autos and appliances, has fallen 25% since it peaked at $925 a ton last July, according to UBS.
"We observe that supply exceeded demand ... over the last six months," said UBS analyst Andreas Bokkenheuser in a note to clients. "This explains the corresponding 25% price correction."
Spending money in the wrong places
More domestic capacity could be on the way. American steelmakers have announced plans to spend billions of dollars to increase capacity by 10 million tons annually since the tariffs were announced. Nucor alone has said it will spend more than $2 billion to add more than 2.6 million tons of capacity in the coming years.
The tariffs encouraged American steel companies to increase investment beyond simply increasing capacity. The steelmakers argue they needed to make the investment to be competitive for the future.
For example, US Steel announced this month that it is it is spending $1.2 billion on a new kind of steel mill that turns molten steel directly into thin sheets of steel on rolls. That technology would eliminate the step that steelmakers have used for more than a century to pour steel into thick slabs, let newly formed slabs cool and then reheat those slabs to press the steel into thin rolls. US Steel's plant would be the first in the country and one of only a few in the world.
"We're now pivoting from playing defense to offense," said CEO David Burritt.
But it's unclear how much of a future American steel has without continued tariffs or some other limits on cheap foreign steel, particularly from China.
"We're among the lowest-cost producers. We're extremely competitive if we're operating on a level playing field. But there is massive overcapacity of steel from China, multiples of US capacity, and it's heavily subsidized by the government. That's led to a very distorted global market for steel," said Kevin Dempsey, senior vice president of public policy for the AISI. "If we lifted the all the tariffs, I think we'd see another flood of imports."
Missing the buyback bonanza
Although companies are typically praised for plowing increased profits back in their core business, the additional capacity and investment is not how investors want the companies to spend their money, said Philip Gibbs, steel analyst for KeyBanc Capital Markets.
Because of that investment, steel companies did not initially participate in the stock buyback bonanza that followed the 2018 corporate tax cuts, which lifted so many American stocks. Most companies, like US Steel and Nucor, announced only modest buybacks that were dwarfed by their capital spending plans.
"They had expected the companies to give back to shareholders," Gibbs said. "Companies didn't really do it — they decided they'd spend billions on new assets, new capacity, multi-year investment programs. As a result, the stocks were punished,"
The outlook for US steelmakers looks much more difficult than it did when the tariffs were first imposed. The companies will probably struggle because of weaker demand, increased domestic capacity and less protectionist trade policies. That will probably increase pressure on domestic steelmakers for the rest of this year and into 2020, said Cowen steel analyst Tyler Kenyon, in a recent note to clients.