How a Trump Presidency Could Reshape the Steel Industry

Authored by:?Santiago Luna, Sharon Htut?and Mateus Cavalcanti

Chinese Steel Industry Struggles

Just three weeks after the Chinese government announced its most aggressive stimulus package since the COVID-19 pandemic, Chinese stocks have retreated as investors demand more fiscal stimulus to revitalise a slowing economy. Recent volatility has shifted attention to China’s fiscal policy and property market. Following a week-long national holiday market closure, Chinese stocks dropped overseas despite a significant stimulus package. The CSI 300 closed up 6%, but Hong Kong’s Hang Seng Index saw a 9% plunge—the steepest in 16 years. In the U.S., the NASDAQ Golden Dragon China Index fell 6.5%.?

Addressing concerns about the stimulus's long-term effects, Morgan Stanley analysts reinforced calls for Chinese fiscal activity cautioning, "Sustainable reflation still requires a fiscal package of about 10 trillion RMB focused on consumption, debt restructuring, and property”. So far, Beijing has been very cautious about further numbers being released, putting investors on edge.?

China’s property market crisis has triggered a chain reaction impacting sectors involving construction and materials. This comes after regulators have tightened control on investor’s excessive borrowing. The steel industry is particularly exposed as it is closely linked to construction. China Baowu Steel, the world’s largest steel producers, warned of a downturn worse than 2008, with weak domestic demand but record-high exports, raising fears of dumping. Tariffs from the EU and Canada have already been imposed, and the U.S. may soon follow suit under a potential Trump presidency.

On the current investment outlook on China, Alicia Garcia-Herrero a Spanish economist warns, "They have created a bubble but are not prepared to provide it with the necessary fiscal stimulus." As a result, investors, particularly those investing in overseas listed Chinese stocks, are urged to proceed with caution in the near term. Beware especially of consumer spending and industrials.?

Steel Markets in 2018 amid US-China Trade War

Trump administrations tend to have effects on commodities prices. During Trump’s election campaign for 2024, tariffs against Chinese imported goods, such as steel, have become a critical point of his discussion. Trump announced plans to impose tariffs of up to 60% in his speech in the Committee for a Responsible Federal Budget in April 2024.

Using Market trends in the steel industry during Trump's last administration in 2018, when he announced the plan to impose tariffs of 25% on steel and 10% on aluminium imports on March 1st, to speculate about possible future market trends if Trump won the elections and imposed further tariffs on the Chinese steel industry.

When Trump committed to the tariffs during March of 2018, there were shocks in both the American and Chinese Steel industries, both of which experienced fluctuations. Figure 1 illustrates there was a strong upward trend in the stock prices for American steel companies, due to confidence in the market and increased production. However, this did not last long as volatility soon followed due to growing fears that trade war would ensue.

Although during the period after Trump’s administration announced the tariffs, we can see in Figure 2 that there were downward trends in closing prices for the Chinese steel companies, overall Chinese stock prices remained relatively stable, despite the tariffs.

Consequently, we speculate that if Trump were to win and impose these tariff’s it could prove dire for American industries as the fear of another trade war could create volatility in the American steel industry. Not only are (demonstrated in 2018) Chinese industries robust, but the lifeline from the Chinese Government could also prove essential in keeping stock prices stable in the Chinese steel market. However, some argue that these prices are a symptom of a bubble in the market.

Fundamentals Over Political Noise

The Chinese steel industry seems to be largely influenced by domestic economic conditions, showing limited sensitivity to U.S. tariffs, whereas U.S. stocks are more reactive to policy changes, especially under Trump’s administration. With potential volatility in the U.S. market and concerns of a bubble in China, it’s crucial to base investment decisions in the steel industry on macroeconomic fundamentals rather than political developments.

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