Steel tariffs leave market shaken and stirred

As of mid-March, the Steel Market Update hot-rolled index was averaging $840 per ton ($42/cwt) FOB the mill for spot tonnage.

Fabricators and manufacturers must be wondering how President Donald Trump’s tariff on steel and aluminum imports will impact their businesses. As of mid-March, it’s still too soon to tell.

Here’s what we know. On March 8, after months of delays and much speculation, the president signed a proclamation calling for a 25 percent tariff on imports of steel and a 10 percent tariff on imports of aluminum. (For the purpose of this article, we will focus only on steel.) The tariffs, which take effect March 23, apply to steel imports from all countries except two important U.S. trading partners: Canada and Mexico. (Their exemptions may be only temporarily, as Trump has threatened to reconsider them if the U.S. does not get concessions in the NAFTA negotiations). The tariffs apply to all steel products, including finished forms and semifinished items such as billets and slabs.

The market had been holding its breath waiting for a decision by the Trump administration since it initiated an investigation under rarely used Section 232 of the Trade Expansion Act of 1962 last spring, which gives the administration the authority to impose trade sanctions if it believes imports pose a threat to national security. To no one’s surprise, Commerce Secretary Wilbur Ross—a former steel executive himself—did find that dumped and subsidized steel from China and other countries has harmed the U.S. steel industry, which is vital to the nation’s defense. The U.S. Department of Commerce presented the president with several options: quotas, a 24 percent blanket tariff on all steel products, or tariffs targeted only at the countries with the worst record of dumping and circumvention. In the end, Trump chose his own course of action with an almost-blanket tariff of 25 percent.

Had the debate ended there, it might have brought some closure to the market and allowed players to plan and invest with some degree of certainty. But the president also promised “flexibility and cooperation for those who are friends of ours,” saying he is willing to waive the tariffs for other U.S. trading partners that can make a case for special treatment.

“We will remain open to modifying the tariffs on individual nations as long as we know they are not a threat to our national security,” he said. Thus, it remains unclear exactly which imports from which countries will ultimately be at a competitive disadvantage.

The Commerce Department is due to issue procedures for exclusion requests by March 18. According to the tariff proclamation: “[The Commerce Secretary] is hereby authorized to provide relief from the additional duties set forth in … this proclamation for any steel article determined not to be produced in the United States in a sufficient and reasonably available amount or of a satisfactory quality and is also authorized to provide such relief based upon specific national security considerations. Such relief shall be provided for a steel article only after a request for exclusion is made by a directly affected party located in the United States.”

Some precedent for tariff exclusions have occurred in the past. In the safeguard tariff regime of 2002-2003, exclusions were granted on more than 400 products, according to Washington trade attorney Lewis Leibowitz.

“We don’t know if that will be repeated this time. The situation is very muddled,” he said.

The line to file exclusion requests could be a long one. Citing a Twitter exchange with Trump, Australian Prime Minister Malcolm Turnbull already claims his nation has been granted an exemption.

Meanwhile, import offers have slowed considerably, and domestic producers have pushed through a series of price hikes, taking the price of steel to levels not seen since 2008. As of mid-March, the Steel Market Update hot-rolled index was averaging $840 per ton ($42/cwt) FOB the mill for spot tonnage. Price offers are nearing $900 per ton and could very well be at that level in early April. SMU’s hot-rolled index peaked at $1,070 per ton ($52.50/cwt) back in 2008 just before the total collapse of the market. Buyers of cold-rolled or coated steels can add $100 to $140 per ton to the hot-rolled number to get an approximate base price before any extras.

The inclusion of semifinished steels is new to trade cases and remedies as semis are purchased only by domestic steel producers. By adding semis to the mix, the president has put thousands of steel jobs at risk. California Steel, NLMK USA, Evraz Oregon, and other mills need slabs from foreign steel sources. With no steel-producing mills on the West Coast, manufacturing and construction companies west of the Rocky Mountains could be hurt by inadequate supply.

The key question come April will be “Is there enough supply to satisfy the needs of the U.S. manufacturing and construction segments of the economy?” It is SMU’s opinion that a shortage will occur unless the U.S. government expands the number of excluded countries, and potentially some products such as slabs. Key countries to watch for exclusions are Taiwan; South Korea; India; Japan; Turkey; Russia; Brazil; and the European countries, especially Germany.

Here’s what steel buyers can count on: It will take months for the tariff situation to sort itself out as the administration processes an untold number of exclusion requests.

Exclusions almost certainly will be worked out for a number of U.S. allies. The tariffs also almost certainly will be challenged before the World Trade Organization and the courts on the grounds that their application extends too broadly beyond the national security basis of Section 232. One other thing to consider is that Congress may act to nullify the tariffs and prevent them from harming the U.S. economy.

Another certainty: With reduced competition from imports, steel prices are likely to continue rising, possibly to record levels.

Fabricators and manufacturers needing an exclusion on products they buy from foreign sources should file with the Secretary of Commerce right away.

If you’d like to learn more about the steel market, consider attending the eighth SMU Steel Summit 2018, the largest steel Conference in North America, Aug. 27-29, in Atlanta. More than 800 executives are expected at this year’s event, representing manufacturing companies, metal fabricators, steel service centers, steel mills, trading companies, and suppliers to these industries. For more information, call 800-432-3475 or visit www.steelmarketupdate.com/events/steel-summit.