Steel, Rail & Coal Industries Watch Expectantly As Trump Signals Renewed Focus On Infrastructure

President Trump has embarked upon a renewed push for realizing a key campaign promise — the rebuilding of American infrastructure, focusing on transportation infrastructure. The President had outlined plans for a ten-year $1 trillion overhaul of U.S. transportation infrastructure on the campaign trail. ^[1] While the implementation of such a plan would certainly rekindle economic growth and create jobs, the realization of this particular campaign promise is by no means a foregone conclusion, with the interlinked problem of the financing and legislative enactment of the infrastructure plan the major obstacle.

The enactment of the infrastructure plan in Congress is likely to be far less contentious in principle, as compared to the controversial Republican healthcare bill. Investment on infrastructure is less susceptible to polarization along ideological lines, particularly due to the potential for job creation that infrastructure investment entails. However, the primary question is, how does the federal government plan to finance this massive increase in spending? The federal government has proposed a mix of public and private funding, expecting public expenditure of around $200 billion to catalyze the spending of the remainder from the private sector. ^[1] The Trump administration plans to spur private investment through a combination of a reduction in corporate taxes and the easing of restrictive regulation across sectors, which act as impediments to higher private investment. Whether these measures will be enough to mobilize private investment at the scale envisioned remains to be seen. Nevertheless, even if Congress enacts the President’s tax plan, it is likely to raise concerns over the financing of the government’s share of infrastructure spending. Lower tax collections would necessitate higher federal debt in order to finance the infrastructure plan, which could create opposition from certain sections of Congress intent on fiscal prudence. Moreover, if the federal government is unable to come up with a credible plan to mobilize sufficient levels of private investment, it would have to increase the government share of spending, which is likely to face resistance in Congress. Thus, the financing of the infrastructure plan is a conundrum that the federal government has to address before there’s any possibility of the implementation of the plan.

While securing the funding for the infrastructure plan is not expected to be a straightforward affair, the potential benefits of the implementation of the plan could embolden lawmakers on both sides of the aisle to take the plunge.  A push to revitalize the nation’s bridges, railroads, and other transportation infrastructure would certainly sharply boost the demand for steel in the U.S.  Stock prices of steel companies have risen considerably since President Trump was elected, in anticipation of higher demand for steel driven by the proposed infrastructure plan. In addition, the federal government continues to explore ways to clamp down on unfairly traded steel imports that negatively impacted the fortunes of domestic steel companies and forced them to make significant cuts to their respective workforces. A stimulus to steel demand that the enactment of the infrastructure plan represents could not only result in the reinstatement of those workers laid off, but could also generate a number of new jobs in the steel industry. The cumulative result of regulatory action taken and expectations of higher steel demand going forward have spurred a recovery in steel prices, as illustrated by the following chart depicting our forecast for U.S. Steel’s Flat-rolled steel realized prices.

The fortunes of steel quite often go hand-in-hand with that of coal mining, specifically metallurgical coal, which is used as an input in the production of steel. Higher demand for steel could spur the demand for and production of metallurgical coal in the U.S. Higher demand for steel and coal would provide a fillip to rail shipments of these commodities, benefiting railroad companies. Moreover, with the federal government’s emphasis on revitalizing transportation infrastructure, railroad companies could potentially benefit from specific federal incentives for railroad investments. Other areas of investment in transportation infrastructure, such as the construction of new highways and roads, could spur the demand for asphalt. Higher demand for asphalt, which is a product refined from crude oil, could generate additional business for downstream oil companies. Lastly, higher economic growth and employment generated from enhanced infrastructure spending could have secondary benefits for other sectors of the economy.

While the benefits of the infrastructure plan are multifold, the plan of course needs to see the light of day first, which brings us back to the problem of financing. With the President signaling that he intends to take up the infrastructure plan with a renewed focus, a period of intense political negotiations is likely to begin. Political negotiations have been fractious in recent times, particularly over the healthcare bill. Will Congress pull together to pass legislation on infrastructure? Steel, railroad, coal, and other companies and their stakeholders will be watching with bated breath.

Have more questions about U.S. Steel? See the links below.

• Underperforming Amid Favorable Business Conditions: The Curious Case Of U.S. Steel
• U.S. Steel’s Q1 2017 Earnings Review: Unexpected Decline In Flat-Rolled Shipments Weighs On Results

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Notes:

1. President Trump to Launch Push for Infrastructure Investment, Wall Street Journal [↩] [↩]