Steel Quotas Could Be on the Way: Is This Bad News for Stelco?

Stelco Holdings Inc. (TSX:STLC) stock was down 4.6% in late afternoon trading on October 5. Shares received a brief bump after news of a tentative deal between the United States, Mexico, and Canada was announced. However, it was soon revealed that steel and aluminum tariffs would remain in effect and taking them off would be a separate negotiation.

This may not strike investors as the worst news in the near term. Stelco and other Canadian steel companies have received a boost in the short-term as tariffs have jacked up steel prices.

In the second quarter, Stelco reported that revenue rose 67% year-over-year to $711 million while adjusted EBITDA surged 130% to $175 million. The company incurred approximately $11 million in tariff-related costs, but financial results were aided by higher steel prices.

U.S. President Donald Trump suggested in a press conference this week that the administration may explore imposing quotas "so that our industry is protected".

Aluminum tariffs of 10% also remain in place. Jean Simard, president of the Aluminum Association of Canada, has said that quotas could also be very damaging in the long run. "Quotas are not easy to manage and are in fact very disruptive to our value chain," he said. "So, we are dead set against them."

Stelco stock has been a good performer since its initial public offering in November 2017. Holders or prospective buyers will want to monitor negotiations as the final deal is expected to be ratified in the fall.

It is likely that Canada and Mexico will push to have the book closed on steel and aluminum before the year is finished.