What are U.S. investors thinking about Trump's steel tariffs? UBS weighs in

UBS analysts report that increased U.S. tariffs on steel and aluminum imports, now at 50%, are weighing on steel demand due to project delays and supply chain disruptions, leading to a weak demand environment in key sectors like construction and auto, with weekly shipments down 0.5% year-to-date. The uncertainty surrounding the longevity of these tariffs beyond 2028 is causing investors to be bearish on U.S. steel stocks, though sustained tariffs could create upside risk for companies like Cleveland-Cliffs, Nucor, Steel Dynamics, and Commercial Metals.

Analysis

The U.S. steel market is currently navigating heightened uncertainty and a weakened demand landscape following the U.S. administration's decision to double tariffs on steel and aluminum imports to 50%, effective June 4. According to UBS analysts, this measure has intensified pre-existing concerns, contributing to a 'weak' demand environment in crucial end markets such as construction, automotive, and service centers. This is evidenced by a 0.5% year-to-date decline in weekly steel shipments, attributed to project delays stemming from elevated costs, supply chain disruptions, and an opaque inflation outlook. Investor sentiment towards U.S. steel stocks, described by UBS as 'quite bearish' even before the latest tariff escalation, is further clouded by ambiguity regarding the tariffs' persistence beyond a potential second presidential term ending in 2029. While many anticipate tariff reductions via carve-outs, similar to past exemptions, UBS suggests that if the 50% tariffs remain effective through at least 2028, there could be 'upside risk' for U.S. steel producers including Cleveland-Cliffs (CLF), Nucor (NUE), Steel Dynamics (STLD), and Commercial Metals (CMC). Conversely, UBS warns that if import protections diminish around 2029, coinciding with new capacity introductions, investors may apply 'haircuts to margins post 2028 and lower multiples to 2025/26 EBITDA.' UBS currently holds 'buy' ratings for Steel Dynamics and Nucor, and a 'neutral' stance on Commercial Metals, reflecting a complex outlook shaped by these trade policies and an overall moderately negative market sentiment.

Key Decisions for Investors

• Investors should closely monitor the evolution and perceived durability of the newly imposed 50% U.S. steel tariffs, as these are pivotal to the sector's performance and current valuation uncertainties.
• While acknowledging the prevailing weak demand and bearish sentiment, consideration may be given to selective exposure in U.S. steel producers like Nucor (NUE) and Steel Dynamics (STLD), which carry 'buy' ratings from UBS, particularly if there is a conviction that significant tariff protection will be sustained.
• Factor in the long-term risk of potential margin compression and reduced valuation multiples for steel companies after 2028, should tariffs be substantially eased or if new domestic capacity significantly impacts the supply-demand equilibrium.