Be careful what you wish for.
Shares of U.S. steelmaker Cleveland-Cliffs (CLF -16.90%) plunged 16.9% on Thursday, which was significantly worse than the 4.8% plunge experienced by the S&P 500 index.
Some might be confused as to why Cleveland-Cliffs, a domestic steel supplier, would be down so much on last night’s sweeping tariff announcements from the Trump administration. After all, Cleveland-Cliffs is one of the larger domestic steel producers in the United States. So aren’t the administration’s tariff policies supposed to help prop up prices for domestic steelmakers?
As investors may have found out back in 2018 when steel tariffs were implemented and trade wars ramped up, adversarial trade policies aren’t the greatest for steel end-market demand, especially autos. Back then, the drop in demand proved to outweigh the benefits of the tariffs, and that’s certainly what investors expect now.
Cleveland Cliffs making layoffs, not building new plants
Cleveland-Cliffs had already felt the negative effect of tariffs even prior to last night’s announcement. One week ago, the company announced it would be laying off 600 employees and idling one of its steel plants in Dearborn, Michigan, this summer.
That announcement came on the heels of an earlier layoff announcement by the company in mid-March, when it announced the “temporary” layoffs of 630 workers at two of its mining operations in Virginia and Hibbing, Minnesota. Of note, Cleveland-Cliffs is vertically integrated, with both iron ore mines as well as downstream steel operations.
This may seem counterintuitive. After all, 25% tariffs on steel, which had already been announced before last night’s more sweeping measures, are supposed to protect domestic steelmakers, boosting demand and therefore sustaining employment.
However, it appears tariffs are having the opposite effect, at least in the near term. While last night’s tariff announcements shocked the market with their size and scope, the mere threat of tariffs leading up to April 2 had already depressed demand, especially for autos, a key end market for steel. And it appears the tepid demand is overwhelming any incrementally higher prices for domestic steelmakers as a result of tariffs.
Management offers an optimistic spin
In conjunction with the steelmaker layoffs, Cleveland-Cliffs said in a statement: “These actions will allow the company to operate more efficiently and in a more cost-competitive way for the current market environment. … We believe that once President Trump’s policies take full effect and automotive production is reshored, we should be able to resume steel production at Dearborn.”
While management is painting an optimistic picture — perhaps in an attempt not to offend the current administration — it is very unclear when demand for big-ticket items such as autos could reignite. After all, tariffs are a regressive tax on consumers, which will make a broad array of the U.S. population less able to purchase a car, especially if the very high tariffs announced last night go into full effect.
Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.