Vic's Picks - Steel Tariffs and LNG Plants

The Real Estate Espresso Podcast

Vic’s Picks – Steel Tariffs and LNG Plants

Spotify Google Podcast Apple Podcast Subscribe via RSS Leave a Review

Vic’s Picks – Steel Tariffs and LNG Plants

Welcome to The Real Estate Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. Over the next few weeks, we’ll be starting a new feature on the podcast called Vic’s Picks. Vic’s Picks are predictions that I’ll be making on a quarterly basis.

On today’s show, we’re talking about the implications of the 25% tariff on steel and aluminum imports. In response to Ontario’s Premier Doug Ford’s decision to impose a 25% surcharge on electricity exports to the US, President Trump announced a plan to apply an additional 25% tax on all steel and aluminum imports from Canada, thereby doubling the total taxes on these imported products to 50%. Initially, President Trump paused the additional tax for about six hours; he later imposed a 25% tariff.

The Ford F-150 pickup truck, this happens to be the number one selling vehicle in the US. Unlike the other vehicles, its primary material is aluminum, as opposed to steel. The aluminum is mostly sourced from Canada and it contributes to the truck’s fuel efficiency. In light of this, I believe that President Trump intends for the F-150 to continue thriving in the market.

From the viewpoint of the natural gas industry, the tariffs could significantly impact the substantial Liquefied Natural Gas (LNG) expansion; for such projects, there’s heavy reliance on steel and aluminum for fabricating the plants’ piping and cryogenic facilities, and constructing the pipelines that supply natural gas to these plants. If these tariffs persist, it could significantly affect six pre-construction stage LNG plants, and five others currently being built, by increasing their costs by over 10%.

Given this scenario, here’s my prediction: the tariffs on aluminum and steel would cause such considerable harm to the LNG plants’ construction, rendering the projects dead in the water. Nevertheless, I know for a fact that President Trump has an interest in these LNG plants.

From a geopolitical perspective, the U.S. stands to gain by selling its liquefied natural gas in the global market, essentially diminishing dependence on Russian natural gas. Recently, I engaged in a conversation with George Ross. Those who follow this show might be familiar with him; George was an executive vice president in the Trump Organization and was in Donald’s employ for 47 years. He has an in-depth understanding of Donald, his character and is probably one of the best individuals to decode Donald’s negotiating playbook.

The question posed was, why would you level tariffs against your closest trading partners, Canada and Mexico? Given that your own economy is heavily reliant on the raw materials they supply, including steel and aluminum, it quite simply doesn’t add up. This led me to an assumption, which George confirmed: the purpose of this public war of words with the nations in question is to send a message to the rest of the world – nobody is safe. This tactic aims to gain leverage in wider negotiations.

Several LNG plants are under construction and more are in the planning phase. These are sizable ventures associated with names like VentureGlobal and Commonwealth. One of them, Driftwood LNG plant, is already under construction. Last fall, Australia’s Woodside took over, investing a little over one billion out of the initial one and a half billion for the first phase. An increase in plant costs by one and a half billion may force them to raise another 1.5 billion on top of their initial 3.6 billion investment. An investment that’s 41 percent higher might just kill their project as they might now have to go back to their investors for more funding – a complex negotiation.

These tariff measures could stay in place long enough to influence global negotiations but might not last long enough to cause long-term damage to the projects that the president genuinely desires to complete.

Announcements by the president on ‘drill, baby, drill’ won’t solve the problem. Unless there’s an increase in export capacity, producing excess gas at such low prices won’t be an economically viable solution, resulting in a supply-demand inequality. While the price for natural gas in the U.S is $4.15 per million BTUs, the figure jumps to $14.10 in Japan.”

To publicly voice my prediction: these tariffs will not last long. The United States simply cannot build pipelines and LNG plants exclusively with domestic steel, as there isn’t enough of it. The White House needs these LNG plants, and they need the Ford F150. As you ponder over this, have a fantastic remainder of your day. Go create something awesome. Let’s talk again tomorrow.