Section 232 panel addresses how tariffs affect supply chain

It’s been almost a year since President Donald Trump imposed the Section 232 tariffs on imported steel and aluminum, an act he considered to be a matter of national security and economic protection.

The Section 232 tariffs include a 10 percent aluminum tariff and 25 percent steel tariff that have been levied against most countries, including longtime close trading allies Mexico, Canada, and the European Union – which have all responded with retaliatory tariffs against the U.S.

So now that nearly 365 days have passed, how have the tariffs played out for metal fabricators and other metalworkers, and what does it all mean for the future? Well, no one is exactly sure on the latter question, but many in the industry know Section 232 is not benefiting metal fabricators as increased costs trickle down through the supply chain.

That was the consensus from the “232 Tariffs and Quotas: The Mechanism of Protection” panel discussion, which took place March 6 during the FMA Annual Meeting in Nashville, Tenn.

“We don’t know what’s going to happen,” said panelist Andrew Gross, president and CEO of Bedford Park, Ill.-based Alliance Steel. “And if somebody in the room could tell us, there’d be common peace. You can see there’s just going to be disruption throughout the market until we have a clear path.”

That ambiguity is emphasized by failed attempts to end the tariffs over the past year. During the G20 summit in Argentina this past November, the U.S., Canada, and Mexico agreed to a new trade deal, the United States-Mexico-Canada Agreement (USMCA), to replace NAFTA. There was hope the new trade agreement, which is yet to be approved by the U.S. Congress, would include Section 232 protections for Canada and Mexico. But that’s not the case as the tariffs would remain if USMCA is implemented.

And earlier this week United States Trade Representative Robert Lighthizer said that the U.S. is attempting to work out a way to lift the steel and aluminum tariffs against Mexico and Canada. But there hasn’t been a detailed explanation of how exactly to resolve Section 232 stress.

That has only added to the uncertainty hanging over the metal fabrication industry, said panelist and Washington D.C.-based trade attorney Lewis Leibowitz.

“Each time I talk to a group of businesspeople like yourselves, the one word that keeps coming up is ‘certainty.’ Everyone craves it,” Leibowitz said. “And while we never have perfect certainty, government action impacts the level of comfort. But the problem now is that the 232 tariffs are simply too thin a reed to base a sustainable market system.”

Leibowitz went on to point out that the Section 232 tariffs have benefited only a select few in the U.S. steel supply chain – large steel mills.

Vince Pappalardo (left), managing director at Brown Gibbons Lang & Company, moderates the “232 Tariffs and Quotas: The Mechanism of Protection” panel discussion, which took place on March 6 during the FMA Annual Meeting in Nashville. Panelists include, from left, Washington D.C.-based trade attorney Lewis Leibowitz; Piyush Sood of Morgan Stanley; Kooima Co. owner Phil Kooima; and Alliance Steel President Andy Gross.

“There are two worlds here,” Leibowitz said to the audience in the Westin Nashville hotel banquet hall. “There’s the above-the-line group, which includes a relatively small number of companies, and then there’s the group below the line. That’s you – not benefiting from 232. You’re just coping with 232.”

Panel moderator Vince Pappalardo, managing director of Brown Gibbons Lang & Company in Chicago, provided data that showed there are between 50 and 60 steel-consuming workers to every 1 steelworker.

Fellow panelist Phil Kooima, owner of Kooima Co. in Rock Valley, Iowa, shared the same viewpoint that the tariffs support a select few. He added that affordable steel benefits fabricators throughout the supply chain.

“We are a consumer of steel, and it is my opinion that Section 232’s goal was to protect a small number of mills at the expense of the greater fabrication industry,” said Kooima, whose company specializes in metal fabrication and other services such as trucking, stocking, and kitting. “The United States should import as much low-cost steel as possible to make us fabricators more competitive. Low-cost steel is a commodity to us. There’s no benefit to fabricators to have high-priced steel, just as there’s no benefit to have high-priced electricity.”

Kooima said the end game of Section 232 should be to offer a way to source steel globally to make the industry as a whole more competitive.

And while Gross agreed that fabricators should be able to buy and sell at fair market prices, the steel service center owner doesn’t think the impact of Section 232 should be understated.

“This far into what has been imposed under 232, and what has happened to pricing, can be devastating at the service center level,” Gross said. “Most modern, moderate-sized service centers carry tens of thousands of tons of steel, and our biggest fear is that 232 is going to keep driving up those prices. And if we unwind that in a rapid fashion and instill quotas to buffer the freefall, we will face what I think will be catastrophic issues for steel service centers.”

Gross pointed out that the industry started to see steel scrap and mill product markets decline this past autumn, including the hot-rolled coil (HRC) sector.

But where has the absorption of the tariffs really affected the industry? As metal fab shop and service center owners, respectively, Kooima and Gross said the market has absorbed the tariffs fairly well up to this point by doing its best to pass the costs on to customers. However, that practice isn’t sustainable, added Gross.

“When you throw 25 percent onto product, we can’t live in that world,” Gross said. “Somebody told me a long time ago, as a service center, we don’t make the steel and we don’t control the markets. All we can do is put a Band-Aid on a very difficult situation.”And from a fabricator’s perspective, Kooima offered his best practices to manage through the Section 232 tariffs, including keeping inventory as lean as possible.

“We shorten our inventory days as impressively as we can to stay as current as we can,” Kooima explained. “On the pricing side, we tie ourselves to an index with our customers – like CRU or something similar. But hedging only works really well in a dynamic market. When you have these 232 tariffs, hedging becomes very difficult.”

But while there’s no definite end in sight for the tariffs disrupting the middle and lower levels of the supply chain, the panel agreed that a solution needs to come sooner rather than later. Leibowitz thinks the Trump administration won’t want to address steel and aluminum tariffs during the 2020 election cycle, so he believes the pressure needs to be brought before the end of 2019. And Kooima doubled-down on the urgency, saying it was a matter of industry survival.

“While we are wrangling between the mills, distributors, and fabricators about how to price our products, our customers are finding solutions that are low-cost around the world,” Kooima said. “We need to figure this out as a group because our customers are figuring it out very, very fast. They really don’t care what discussions we are having here. They are going to get the lowest cost and more sufficient steel stampings around the world with or without us.”