The share price of BlueScope Steel Limited (ASX: BSL) is recovering some of yesterday's losses on news that the US government is considering exempting the steel manufacturer from 25% import tariff, but an exemption may mean little to the earnings of BlueScope.
This is because the price of US steel has already surged to reflect the passing of US President Donald Trump's trade tariffs on imported steel and aluminium and Credit Suisse thinks it is inevitable that consensus upgrades will soon follow.
"The 25% steel tariff measures imposed by the US should in our view underpin currently elevated US steel spreads over the short-to-medium term, driving additional earnings growth to BSL's 2H18 guidance articulated at the 1H18 (26 Feb) results, and growth in FY19," said Credit Suisse, who has an "outperform" recommendation on the stock.
"We have increased our already above consensus earnings estimates on adoption of higher US spread forecasts and expect consensus will follow suit to at least some degree (CSf EPS FY18 up 5%, FY19 up 17%)."
The substantial upgrade to the broker's earnings per share (EPS) forecasts has led to an increase in its price target on BlueScope to $16.90 from $15.90 a share.
BlueScope has US operations through its North Star steel business the SteelScape joint venture on the West Coast.
But the broker's bullish call is predicated on the assumption that US customers will be able to absorb the increase in the steel price without any drop-off in demand for steel.
This is something that investors will need to keep a close eye on. BlueScope's earnings are particularly sensitive to a drop in demand due to its high operating leverage.
Steel manufacturers have high fixed costs. When sales drop, it will have an exponentially larger impact on profit. The opposite is true when revenue rises.
If BlueScope does get the coveted exemption from the Trump Tariff, it will be cream on the cake as it will enjoy the benefits of higher US steel prices and suffer none of the burden from the protectionist policy when its competitors will.
While BlueScope looks to be in a relative sweet spot, the same can't be said for other steel-related businesses.
Any increase in tariffs on Chinese steel exporters will have a negative impact on our major iron ore producers BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
However, this outcome could actually provide a silver lining for Fortescue Metals Group Limited (ASX: FMG). Click here to find out why.
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