On May 17, investors breathed a collective sigh of relief, as U.S. and Canadian officials announced a tentative agreement on steel tariffs. The deal, in which the U.S. agreed to lift $1.27 billion worth of tariffs on Canadian goods, was hailed as a victory by the Trudeau government, whose officials referred to it as a “win win for everyone involved.” Many Canadian steel workers remain skeptical of the deal, expressing a desire to see Canadian counter-tariffs remain in place, but for investors, an end to cross-border trade tensions is a welcome development — especially given the ongoing drama between the U.S. and China.
Although most Canadian companies were never affected by the tariffs that had been in place, a handful of steel and auto companies stand to benefit from the lifting of trade barriers. The following are two stocks that may enjoy upside as the result of the new agreement.
Stelco Holdings (TSX:STLC)
Stelco is a Hamilton-based steel mill company that has had a fascinating but troubled history. After passing through various owners, the company went public in 2016, raising $200 million. The IPO was required to bring liquidity to the company, which had been on the verge of insolvency for years.
Stelco produces a wide variety of steel products, including sheet steel, drawing steel, and copper. It also provides a number of steel-related services like finishing and processing. Stelco’s steel operations appear to be winding down, as the company has ceased steel production in Hamilton and has only a handful of plants remaining. Nevertheless, the company reported a 7% year-over-year revenue increase in its most recent quarter. Recently, Stelco has been paying about $10 million per quarter in tariffs — a cost that will be eliminated as the U.S. lifts its trade restrictions on Canada.
Magna International (TSX:MG)(NYSE:MGA)
Magna is a Canadian auto parts supplier that provides basic building components to car makers. As an auto parts company, it stands to benefit from the lifting of tariffs in two ways.
First, because Magna produces heavy industrial components, it depends heavily on steel in its manufacturing process. Much of the steel and aluminum the company depends on comes from the States, which has resulted in it paying a premium on these inputs thanks to Canadian counter-tariffs.
Second, to the extent that the recent trade agreement signals a thawing of Canada/U.S. relations, it may bode well for Magna’s future. It’s well known that Trump has been considering auto tariffs against his trade partners — a move that would have disastrous consequences for the Canadian auto industry.
Magna, as part of that industry, would undoubtedly suffer — particularly if Trump brought in tariffs specifically targeting automobile parts. The fact that Canada and the U.S. have come to an agreement on steel tariffs may indicate a general will toward freer trade, which would make any such tariffs less likely. Should that be the case, life will be easier for Magna and its shareholders.
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Fool contributor Andrew Button has no position in any of the stocks mentioned. Magna is a recommendation of Stock Advisor Canada.