President Trump’s ‘America First’ Agenda Is A Boon For Metals & Mining And Railroad Sectors

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“They (foreign governments and global activists) don’t put America first. I do, and I always will,” stated President Trump as he proclaimed the federal government’s intention to withdraw from the Paris Climate Agreement. [1] Bemoaning the disproportionate nature of U.S. obligations under the global climate treaty, the President expressed the federal government’s desire to re-enter the global treaty on terms which are more favorable to the U.S. or negotiate a new climate agreement altogether. While the future course of U.S. commitments under a renegotiated or new climate treaty remains to be seen, President Trump certainly seems to be following through on his campaign promise of creating favorable business conditions for American industry.

Under the terms of the Paris Climate Agreement, the U.S. committed to lower its greenhouse gas emissions by 26-28% below 2005 levels by 2025. [2] In addition, the Paris Climate Agreement, a global treaty under the auspices of the United Nations Framework Convention on Climate Change (UNFCCC), is subject to the UNFCCC’s principle of common but differentiated responsibility. Under this principle, while climate change is a global problem, developed countries are expected to shoulder a disproportionately larger share of the burden for both undertaking emissions reduction as well as mobilizing financial resources to support the emissions mitigation actions of developing countries. Developed countries are expected to raise the mobilization of resources to $100 billion annually by 2020, from around $40 billion in 2014. [3] [4] While the Paris Climate Agreement is applicable from the year 2020 onward, the Kyoto Protocol is the existing UNFCCC treaty in operation. Whereas the Kyoto Protocol exempts large developing countries such as China and India from undertaking greenhouse gas emissions reductions, under the Paris Agreement both China and India – two of the world’s top three greenhouse gas emitters – are expected to undertake emissions reductions. However, under the Paris Agreement every country determines its own emissions reduction targets or ‘Intended Nationally Determined Contributions,’ which again would subject each country to different emissions reduction targets. The disproportionate nature of the obligations for developed countries under the UNFCCC prompted the U.S. to reject the Kyoto Protocol and now President Trump has stated his intention to withdraw from the Paris Agreement.

The rejection of the Paris Climate Agreement frees the Metals and Mining industry from burdensome regulations and environmental obligations that would have been an impediment to the sector’s growth. President Obama’s Clean Power Plan, which would have been an integral component of the U.S.’s strategy to reduce emissions, envisaged a 32% reduction in power plant carbon dioxide emissions below 2005 levels by 2030. [5] The implementation of this plan, which was stayed by the Supreme Court amid legal challenges, would have drastically lowered the demand for coal from utilities and sharply accelerated the shift towards the cleaner burning natural gas as the preferred fuel for electricity generation. It would have dealt a terminal blow to the embattled coal industry, which was already suffering from weak demand conditions over the past few years amid soft natural gas prices (U.S. rail shipments of coal declined by 31% between 2014 and 2016). However, a more favorable regulatory environment under the Trump Administration is expected to revive the coal industry’s fortunes. Shipments of the commodity have already risen 19% year-over-year in the first five months of 2017 amid an increase in natural gas prices and the absence of adverse regulations. [6] The following chart, which depicts U.S. rail shipments of coal, illustrates the revival in the demand for coal. Rising shipments of coal are also expected to boost the prospects of the railroad industry.

Besides setting aside the Paris Agreement, the Trump Administration has taken other actions in order to boost the fortunes of the Metals and Mining sector. The Trump Administration had promised to lower those environmental compliance regulations on the mining industry that it deemed to be superfluous. President Trump signed a Congress resolution reversing President Obama’s ‘Stream Protection Rule,’ which placed strict restrictions on the disposal of mining waste. [7] Going forward, additional measures are expected to be taken to lower the regulatory burden on metals and mining companies, which spend substantial sums on environmental compliance. For example, around 16% of U.S. Steel’s capital spending on average over the years 2014-2016 was dedicated to environmental compliance related spending. [8] Less burdensome compliance obligations should at the very least moderate the growth in these obligations. Besides environmental-related regulation, the Trump Administration has taken a tough stance against unfair trade practices which have negatively impacted the fortunes of the domestic steel industry in years gone by. President Trump has promised to continue to take measures to provide a level playing field for the domestic steel industry against imported steels.

While the Trump Administration’s policies are expected to lower the burden of environmental compliance regulation on U.S. industries, they do not signal a complete abandonment of measures to protect the environment. The Administration intends to renegotiate the applicability of multilateral agreements to the U.S., which would ultimately guide domestic environmental policy. However, the Administration has certainly demonstrated a willingness to follow through on its commitment to take all reasonable measures available to support domestic industries. Going by the Administration’s intent, sectors such as Metals and Mining can certainly look forward to a period of more favorable business conditions as compared to the years gone by, which would also benefit railroad companies in the form of higher shipment volumes.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Norfolk Southern

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Notes:
  1. Statement by President Trump on the Paris Climate Accord, White House Press Release []
  2. Here’s what the US actually agreed to in the Paris climate deal, Business Insider []
  3. Financial, technology and capacity-building support, UNFCCC []
  4. Roadmap to $100 Billion, Department of Foreign Affairs & Trade – Australian Government []
  5. The Clean Power Plan: A Climate Game Changer, UCSUSA []
  6. U.S. Rail Freight Traffic Statistics, AAR []
  7. A Running List of How Trump Is Changing the Environment, National Geographic []
  8. U.S. Steel’s 2016 10-K, SEC []
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