To Be, or Not to Be, That Is the…Tariff?
April 17, 2025
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A lot has been said about the Trump administration’s tariff policy or lack thereof. Companies in my coverage area have been fielding countless questions regarding the potential impacts of said tariffs. My concern right now is centered around those companies with outsized exposure to auto production and those with material exposure to China. Automakers have already announced that they are limiting or cancelling specific shipments to the U.S. altogether. While negotiations and exemptions are anticipated, worries remain that the unknown is still the scope of the retaliation against U.S.-domiciled companies.
It's very difficult for these management teams to operate and make decisions in this environment, where policy changes daily. Regarding autos, we’re witnessing a wave of pre-buying ahead of any tariff-related price adjustments to the manufacturer’s suggested retail price (MSRP). Consumers are clearly anticipating higher prices for both new and used cars, as tariffs affect new car prices and the relative lack of supply may drive potential buyers to used cars.
Furthermore, tariffs on imported steel have supported domestic price increases, as many analysts had suggested. However, the benefits of higher prices have yet to be realized. Underlying demand for steel has seemingly stalled as mills haven’t increased production with higher prices. Typically, producers will increase output to capture the benefits of higher steel prices. Bloomberg reports that current U.S. raw steel output roughly translates to capacity utilization of ~70%.1 Cleveland-Cliffs Inc. (CLF), the major U.S. supplier of the steel used in light vehicles, has announced it would idle certain facilities to manage production levels.
Skepticism remains around domestic auto and steel producers benefiting from this tariff regime. I continue to believe automakers are more likely to rationalize production schedules than to source additional domestic steel. As Greg Zappin also highlighted in last week’s Chart of the Week, the first- and second-order effects of tariffs are likely to weigh on operating margins and could be especially painful for more levered credits.
Key Takeaway
It appears that the current tariff regime has not offered an outsized benefit to U.S. companies, as originally expected. Higher prices for both foreign and domestic goods have only acted to temper demand for many consumer products, especially big-ticket items like cars. This has led to a notably weaker outlook and underperformance at domestic steel producers and those companies tied to auto production. It’s worth noting that these are two key industries in focus for the president’s onshoring and reshoring efforts to bring manufacturing jobs stateside. Post-Liberation Day, my skepticism remains.
Sources:
1Bloomberg
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