China is threatening to retaliate if the US proceeds to impose tough new restrictions and quotas on aluminium and steel imports from the Asian giant and any trade war would be a big negative for our share market.
A trade war is the biggest and most probable threat to the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) and most investors aren't paying attention to this issue.
But there will always be winners and losers to any crisis and there are two ASX-listed stocks that are likely to benefit if the US implements its protectionist policies that will drive up steel and aluminium prices in the world's largest economy.
The first is BlueScope Steel Limited (ASX: BSL). Citigroup believes the steel products maker will be a "material beneficiary" of rising US steel prices through its Northstar operations, which produced 2.1 million tonnes of hot rolled coil and accounted for 29% of group earnings before interest and tax (EBIT) in FY17.
Shares in the stock jumped 1.8% to $16.08 this morning as it retests its decade highs. The stock is up 27% over the past 12 months when the S&P/ASX 200 is only 2.1% higher.
Citigroup has a buy rating on the stock and Credit Suisse has just upgraded BlueScope to "outperform" from "neutral" ahead of the company's results next week due to rising US steel spreads (customers are willing to pay more for quality steel vs. the cheap alternatives like pig iron) and the proposed restrictions on steel.
BlueScope is expected to pay a higher dividend and investors are likely to hear more about capital management initiatives during the results too.
The other stock that could benefit is Alumina Limited (ASX: AWC), which owns a 40% interest in the Alcoa Worldwide Alumina and Chemicals (AWAC) joint venture.
The balance is owned by US aluminium giant Alcoa Corp, which saw a strong bounce in its share price when news of the proposed restrictions on Chinese aluminium was announced.
AWAC is managed and operated by Alcoa and the JV owns a range of assets including bauxite mines and alumina refineries and aluminium smelting facilities.
I have never been enamoured with Alumina Limited as it is just a passive partner that collects dividends from the AWAC JV. I think there are cheaper ways to gain exposure to the commodity given the overhead costs involved in keeping the ASX "shell" afloat.
In contrast, many more resource companies will suffer from a trade war. Mining giants like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) sell directly to China and any quotas or duties imposed by the US government will curtail demand for their minerals.
There is another sector that is benefiting from a global thematic. The experts at the Motley Fool are particularly bullish on this niche sector as they believe it will make a big impact on investment markets in 2018 and beyond.
Click on the link below to claim your free report on this sector and to find out what stocks are best placed to ride the investment wave.
