US President Donald Trump finally followed through to restrict imports of foreign steel, scheduled to take effect in 15 days. On March 8, he announced a 25% tariff on imported steel and a 10% duty on aluminium. The move will potentially reduce US imports of all steel products by 13.3 million metric tonnes or 37% to 22.6 million tonnes. It will also have some knock-on effects on steel-consuming industries based on the dynamics of these industries which are wide, although the direct effect of the tariffs accounts for just over 2%.

We expect potential trade retaliation from the EU and other steel producers, thus heightening fears of a trade war. Exemptions are granted to Mexico and Canada, which are temporary, while the US and its neighbours renegotiate the North American Free Trade Agreement (NAFTA). Besides, the US would also initiate a process for the exclusion of certain products and for countries with a close security relationship with the US to seek exemption.

Meanwhile, it remains unclear as to whether the US will introduce a 53% tariff on the 12 identified countries i.e. Brazil, South Korea, Russia, Turkey, India, Vietnam, China, Thailand, South Africa, Egypt, Malaysia and Costa Rica if it fails to meet the target of reducing 13.3 million metric tonnes on all steel product imports.

The exposure of Malaysia’s exports of all steel products to the US is around 0.3% with an estimated potential loss of about 0.48 million metric tonnes to 0.49 million metric tonnes. However, the loss could be more if the US decides to impose the 53% tariff on all imported steel products from. Brazil, South Korea, Russia, Turkey, India, Vietnam, China, Thailand, South Africa, Egypt, Malaysia and Costa Rica. Malaysia’s loss will be around 0.075 million or 75,000 metric tonnes to 0.021 million or 21,000 metric tonnes (see Table 2).

We expect the USD to weaken from the imposition of the tariffs. Tariffs tend to worsen the trade balance because import demand is less price sensitive in the short term or from the first-round effect of the tariffs. As such, demand will remain the same or drop only marginally while prices paid for imports will rise, thus hurting the trade balance. Based on the tariff structure (with only Mexico and Canada exempted), the USD should weaken to a low of 87.5 within the first month and 86.5 within the third month. In turn, the Malaysian ringgit (MYR) should gain to around 3.87 within the first month and probably reach around 3.84 within the third month. Should the US decide to impose a tariff of 53% on the selected 12 countries, the USD could reach around the 89.0 level in the first month and 88.6 in the third month while the MYR should hover around 3.89 levels in the first month and possibly settle around 3.88 in the third month, given that Malaysia’s exposure to US steel imports is low. (See Table 7)

Meanwhile, the risk for more tariffs by the US cannot be ruled out, given that the president’s view on tariff as a “reciprocal tax” on imports from countries that charge higher duties on US goods compared to what the US charges for their goods. A trade war is a zero-sum game although in the interim period, such noises can add more pressure on the USD to weaken partly due to being a net debtor and sitting in twin deficits. We see the downside risk to the USD around the 83 – 85 levels while the MYR could hover around 3.78 – 3.80 levels against the USD. (See Table 7)

Looking at the equity market, the Dow and S&P are poised to stay healthy while yields on the US Treasury may not be attractive given the risk of uncertainties and possibilities for the Fed to raise rates four (4) times to stem capital outflow and address inflation from higher steel prices. For Malaysia, there could be some knee-jerk pressure on the KLCI mainly due to the influence of the steel prices. However, the appetite on MGS remains. (See Table 8)

Source: AmInvest Research - 9 Mar 2018