Dividends and Why Trump has failed to revitalize the steel industry

When President Trump was campaigning in 2016, he campaigned on bringing some industries back to growth mode and they included the coal industry and steel industry. People in those states reacted positively to the President and his expected policies. In reality, both of those industries are not where the President thought they would be. In the coal industry, because of the price of natural gas, the demand has fallen and 5 large companies are in Chapter 11 bankruptcy.

In the steel industry, Bani Sapra and Paul Wiseman of the Associated Press examined the industry in a recent article. The first policy the Trump administration imposed was a tariff of 25%. The stocks went up, steel prices went up and then crashed for steel prices are down, stocks are down in price and steelmakers employ 100,000 fewer workers than they did 5 years ago.

Prices are down because of lower demand and the industry added production capacity because after tariffs were introduced prices went to $1,006 in JUly 2018, in November of 2019 prices were $557, according to the SteelBenchmarker website.

Although steel making is a high profile industry, prior to President Trump, there were 142,000 jobs and most steel mills are highly automated. In addition, steel producers had enjoyed protection from imports because of the potential problem of dumping steel. Chinese steel had been virtually banned from the US market. Any tariffs would thus affect the US allies, where US companies have operations – Canada and Mexico.

Since the introduction of steel tariffs, the NYSE Arca Steel Index is down 32% and the combined earnings of US Steel, AK Steel, Steel Dynamics and Nucor is down 50% in the first two quarters of 2019. Capacity which had a bump from 73% to 80% is in the 70’s again.

In the world of steel making, China accounts for 54% of the world’s steel production, the US 5%. The World Steel Association forecasts that US demand for steel will slow from 2.1% growth in 2018 to 1% in 2019 and 0.4% in 2020.

For the US companies that need steel some 800 manufacturers (who employ greater than 2 million people) have asked for exemptions from the tariffs so they can buy imported steel products that are not made in the US according to Mercatus. Some companies have moved some of their operations offshore; others have sought alternatives such as plastic or composite materials.

Linking to dividend paying stocks, government policies may work for a year, but after a year companies will adapt to either new alternatives thus the policy will have to be changed. If the government targets policies towards where you have investments, you will benefit in the short run, but in the long run you should keep an eye to alternatives when the old rules of supply and demand dictate the market.

There are more questions than answers, till the next time – to raising questions.

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