Why U.S. Steel Stocks Were Soaring Today

Shares of U.S. steel stocks U.S. Steel (NYSE: X), Cleveland Cliffs (NYSE: CLF), and Steel Dynamics (NASDAQ: STLD) were rallying on Wednesday, up 8.2%, 20.1%, and 13.8%, respectively, on the day.

It wasn't hard to figure out the reason for the rallies, as investors appear to believe the reelection of Donald Trump will be great news for steel stocks due to his penchant for tariffs and lower corporate taxes. Additionally, a potential acquisition of U.S. Steel, which had been in limbo for a while, may perhaps get a second look -- then again, maybe not.

Tariffs and taxes provide a short-term boost

Trump has long been a proponent of helping U.S.-based manufacturing industries through the use of tariffs on imports. Furthermore, during this campaign, Trump also proposed lowering the corporate tax rate to 15%, down from the 21% to which it was already lowered during his last administration.

The combination of even higher tariffs on steel imports could help raise prices to U.S. consumers despite the industry currently being mired in a bit of a slump. Automotive-steel demand soared during and after the pandemic, only to then fall into the current down cycle after the boom.

So, tariffs could help elevate steel prices, and therefore industry profits, with a lower corporate tax rate helping, too -- as long as steel demand eventually restabilizes.

Image source: Getty Images.

Additionally, it's possible the potential takeover of U.S. Steel may get another look. Cleveland Cliffs had originally offered to buy U.S. Steel for $35 per share before the larger Japanese steelmaker Nippon Steel swooped in with an even-higher offer of $55. However, the deal has been opposed not only by the merger-hostile Biden administration but by Trump as well. Still, with the Republicans thought to be much more merger-friendly than the current administration, there is probably higher odds of some deal being worked out either with Nippon or potentially with Cleveland Cliffs.

For its part, Cleveland Cliffs had sold off on Monday after posting losses and missing analyst expectations. That may be why it's climbing higher than the other stocks. Meanwhile, there is an outside shot a deal may still be worked out with U.S. Steel if the Nippon offer is rejected again by Trump.

In the global market, U.S.-based steelmakers tend to have low market share and could therefore benefit from increased consolidation — even if it's with a Japanese firm.

Don't count on the bounce to last

While tariffs may be helpful to steel stocks in the short term, remember that tariffs also went into effect in 2018 under the first Trump administration. That didn't prevent an industry downturn in 2019. This is because even though tariffs limit foreign competition, they raise prices to consumers and can potentially crimp end demand. Additionally, tariffs may only partially offset larger global supply and demand dynamics in a global commodity market such as steel.

Now, the steel industry is in somewhat of a downturn currently, so an automotive upcycle could change the dynamic next year. But interested investors should look for market-driven signals as a sign of whether to buy steel stocks or not. Don't count on government-driven tariffs as your catalyst.

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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.