Article/Intelligence
Impact of President Trump’s Tariffs Targeting Lumber, Aluminum, Steel May Be Felt Far and Wide
- Owing to the sometimes ad hoc nature of the Trump administration’s tariff policy, investors need to consider potential second-order effects from the recently enacted aluminum and steel duties and proposed lumber tariffs. Companies that at first blush may seem unaffected by the tariffs may still be at risk from higher costs.
- With a push on costs from steel and lumber on new home construction, we believe existing homes may gain share from new homes in terms of sales. This could be a benefit to companies such as Anywhere and other brokers who are solely focused on the resale market (as opposed to new construction) with the potential for share gains to offset losses in volume.
- Casinos undergoing large construction projects could be at risk as there is not a real great mechanism to pass on the higher construction prices to its consumers (as opposed to apartments, for example).
- Higher prices for autos and auto parts and construction materials are likely to create cost headwinds for property and casualty insurers until they are through the renewal cycle and able to pass these along through higher premiums.
Existing Home Sales May Gain Share Due to Impact of Tariffs Benefiting Realtors
By William Hong
We expect that President Donald Trump’s proposed tariffs on building materials, namely lumber, will have cascading effects on the building products, homebuilder, real estate broker and mortgage lending sectors. Tariffs may spur negotiation battles between homebuilders and building products companies over home input costs, with smaller homebuilders facing steeper costs because of their weaker bargaining power with suppliers.
Tariffs could also potentially boost prices for domestic products indirectly, further adding to the burden from more expensive Canadian imports, which could further slow housing construction activity. Home affordability is already challenged right now because of low inventories, high mortgage rates and rising insurance costs (more on this below). The existing home market, which is the biggest source of competition for homebuilding, is likely to benefit from a slowdown in homebuilding and less affordable new housing, which in turn would benefit residential real estate brokers and mortgage lenders.
Gaming Could See Impact From Higher Construction Costs and Stretched Consumer
By Kyle Owusu
Tariffs resulting in broad-based price increases could have a negative impact on consumer spending, which would test the elasticity of the casino business. The effects would likely be most acute where there are higher proportions of: i) unrated customers (customers that are not in the casino operator’s database) and ii) competition, because unrated customers tend to be more price sensitive.
Separately, MGM and Wynn, given their exposure to Macau and the Chinese consumer, could feel the negative impact at both their Macau and U.S. assets. However, since MGM’s and Wynn’s offerings are geared toward luxury consumers, they may be less affected if widespread tariffs lead to consumer weakness.
Casino operators Full House Resorts and Bally’s, among others, are potentially exposed to higher newbuild costs because, in many instances, steel or glass used in construction is purchased from China.
Even in cases where the steel or glass is not purchased from China, given the commoditized, global nature of these markets, glass and steel prices will probably be higher, leading to greater newbuild expenses for operators.
P&C Insurers Loss Ratios Likely a Risk
By Patrick Moon
With the price of raw materials expected to increase because of tariffs, property and casualty insurers will likely see weaker-than-expected earnings this year due to the unexpected sharp rise in replacement costs. This could be especially acute for companies with large exposure to rebuilding costs from the California wildfires or recent hurricanes in the Southeast. As home insurers typically reassess premiums annually and auto insurers annually or biannually, we believe loss ratios across the sector will be higher than the carriers initially anticipated until they are able to adjust prices accordingly at the time of renewal. While insurers must ultimately receive approval from state regulators prior to raising premiums, this process is time consuming and may also require advanced notification to customers depending on the level of increase.
Over the recent years of double-digit year-over-year premium growth, largely due to inflationary pressures but also depleted reserves from wide-scale catastrophes throughout the United States, consumers have become more sensitive to rate changes and are exploring the marketplace more frequently to compare their options. Insurers have also become selective with the areas they choose to provide coverage because of the elevated level of natural disasters, and additional pressure to raise prices at a less-than-desirable rate may pressure companies to exit other markets.