Global trade tensions continue to be a source of uncertainty. The role of the United States as one of the most influential economies across the globe has presented limitations on the ability of many business sectors to easily absorb the trickle down effects of recent trade tariffs implemented by the Trump Administration. While this seems to present a problem for most companies that rely on international trade and distribution of products as the crux of their business, tariffs, at least if kept in place only temporarily, could create opportunities for distressed investors.
Two examples of the industries directly impacted are Canadian steel and aluminum producers. The Trump Administration has applied tariffs of 25% on certain steel products and 10% on some aluminum products. These figures would not be as damaging if the size of the US market for Canadian steel and aluminum exports were relatively small. However, 95% of Canadian steel exports and 88% of aluminum exports were destined for the United States in 2017. The negative demand shock triggered by the tariffs, while partially offloaded by increased prices, will decrease revenue and erode operating margins for steel and aluminum producers.
For investors with the view that tariffs are temporary, there was certainly an opportunity to buy the dip in Canadian steel and aluminum. However, if tariffs persist the continued margin pressure could drive especially smaller producers of goods affected by the tariffs into distress. This could be a welcomed opportunity for distressed investors or strategic investors looking to consolidate.
The author would like to thank Milomir Strbac, articling student, for his assistance in preparing this legal update.
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