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How the USMCA Could Benefit US Steel Demand

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US steel demand

The United States, Mexico, and Canada (EWC) have agreed to a new NAFTA deal that’s expected to replace the existing one—the United States–Mexico–Canada Agreement (or USMCA). The regional auto content rules have been enhanced under the new agreement, and 75.0% of cars should be made in North America, compared to the previous requirement of 62.5%. The new rules require more automotive production in regions where workers are paid more than $16.00 per hour.

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Regional content rules

The new deal looks encouraging for the US steel industry, especially for companies like AK Steel (AKS) that count the automotive sector as a key customer segment. More regional content in cars is expected to support North America’s steel demand.

Nucor (NUE) is among the US steel companies that also have operations in Mexico. U.S. Steel Corporation (X) is also building a plant in Mexico along with Kobe Steel.

Interest rates

Looking at the long-term picture, the Federal Reserve’s tightening regime could impact housing and automotive demand. As for the automotive sector, rising gasoline prices could also subdue consumer sentiment. Over the last few years, cheaper loans and low gasoline prices have driven US consumers toward bigger vehicles.

However, rising interest rates and gasoline prices might impact the sales of utility vehicles and light trucks. We could also see an increase in car prices after the new auto content rules are implemented. US automotive companies have already taken a hit on their profitability amid higher steel prices.

In the next article, we’ll see whether there could be a supply-demand mismatch in the US markets (SPY).

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