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Why the Trump Tariff is really a red-herring for ASX investors

The pressure on raw material stocks is unlikely to abate today even as the US stock market staged a comeback in overnight trade and as US President Donald Trump gave his strongest hint yet that Australia could be exempt from his tariffs.

President Trump said Mexico and Canada will be initially exempted from the 25% tariff on imported steel and 10% on aluminium when his protectionist policy kicks in. He also said other countries with close trade and military ties, like Australia, could also be exempt.

This puts BlueScope Steel Limited (ASX: BSL) in a sweet spot but don’t expect the rest of the sector to rally on the news as Chinese steel and iron ore futures tumbled yesterday with Beijing affirming that it stands ready to retaliate against the Trump tariffs.

But you probably can’t blame Trump for the slump in steel and iron ore prices in China – not this time. China actually exports very little steel to the US and only accounts for 2.9% of the material imported to the US in 2017.

This is probably why Chinese leaders have been quiet on the Trump tariffs. If anything, the tariffs are a red-herring although Trump’s threat to restrict Chinese investment into the US to punish the country for stealing US intellectual property is a totally different story.

Commodity traders told Reuters that its weak domestic demand that is behind the 3.4% drop in iron ore price overnight to US$75.84 a tonne as the price of the most actively traded rebar contract dropped by a similar amount. They suggested the sell-off may be more to do with seasonal and other factors.

This is good news for our major iron ore miners like Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) as it means the price of the commodities could rebound in the short-term.

The price of steel and iron ore has rallied just after last month’s Lunar New Year holiday as Chinese industrial cities extended steel production curbs to combat pollution, but prices have since fallen as domestic demand has been slow to return, according to Reuters.

However, steel demand in construction usually ramps up from late March to mid-May as the weather becomes ideal for construction work.

What this means is that any dip in iron ore stocks could prove to be an attractive buying opportunity – this is assuming a full blow global trade war doesn’t erupt in the meantime.

But given Trump’s softening stand on his initial all-encompassing iron-clad tariffs, there is hope that this economic Armageddon scenario will be avoided.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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