“Our Steel and Aluminum industries have been decimated by decades of unfair trade and bad policy with countries from around the world. We must NOT let our country, companies and workers be taken advantage of any longer. We want free, fair, and smart trade.” – President Trump

Last Thursday, in a meeting with industry executives, President Trump announced he would formally sign the trade measures and promised they would be in effect “for a long time.” The White House has been on the brink of announcing steel and aluminum tariffs several times in the past eight months, including in June. In recent days, the President appears to have grown impatient for action. The tariffs – 25% on steel and 10% on Aluminum – cover two materials that are the lifeblood of the construction and manufacturing sectors. The announcement was greeted with fury within key US trading allies such as Canada, Mexico, and Australia, as well as rival China. It also caused concern across global stock markets. The threat of a trade war with China and higher goods prices led to a sharp sell-off in Wall Street on Thursday, causing Asian markets to follow on Friday. AK Steel Holdings was up 2.8%, US Steel Corp was up 2.3% and Nucor rose 1%. However industrial stocks such as Boeing fell as traders feared the tariffs would hit manufacturers. The Dow Jones industrial average ended down 420 points.

The tariffs appear to have divided industries, workers, and policymakers. American manufacturers of steel and aluminum pressed the White House to take action against cheap imports, which they say hurt their ability to compete. On the other hand, companies that use steel and aluminum in their products say tariffs would raise their costs, decrease profits and force them to raise prices or lay off workers.

So, what actually is 232 and what are we, at Pacesetter hearing in the marketplace?

What is Section 232?

According to the Department of Commerce website, Section 232 of the Trade Expansion Act of 1962 (19 U.S.C. §1862) authorizes the Secretary of Commerce to conduct comprehensive investigations to determine the effects of imports of any article on the national security of the United States. Section 232 investigations include consideration of:

  • domestic production needed for projected national defense requirements;
  • domestic industry’s capacity to meet those requirements;
  • related human and material resources;
  • the importation of goods in terms of their quantities and use;
  • the close relation of national economic welfare to U.S. national security;
  • loss of skills or investment, substantial unemployment and decrease in government revenue; and
  • the impact of foreign competition on specific domestic industries and the impact of displacement of any domestic products by excessive imports.

Section 232 requires that the Secretary notify the Secretary of Defense that an investigation has been initiated. The Secretary also consults with the Secretary of Defense regarding methodological and policy questions raised in the investigation and can seek information and advice from other government agencies.

The Secretary’s report to the President, prepared within 270 days of initiation, focuses on whether the importation of the article in question is in such quantities or under such circumstances as to threaten to impair the national security. The President can concur or not with the Secretary’s recommendations, and, if necessary, take action to “adjust the imports of an article and its derivatives.” In addition, the Secretary can recommend, and the President can take, other lawful non-trade related actions necessary to address the threat.

Since 1980, the Commerce Department has conducted fourteen Section 232 investigations. Past investigations and remedies have included the following:

  • Integrated Circuit Ceramic Packaging – 1992
    • Defense provided research and development funding for industry
  • Antifriction Bearings – 1988
    • Implementation of Buy American restrictions on super precision bearings for jet engines and miniature and instrument precision bearings for guidance systems
  • Metal Cutting and Forming Machine Tools – 1986
    • Voluntary restraint agreements with multiple countries on imports and an aggressive domestic industry competitiveness action plan

The Department of Commerce found that the quantities and circumstances of steel and aluminum imports “threaten to impair the national security,” as defined by Section 232.

The reports are currently under consideration by the President, and no final decisions have been made with regard to their contents. The President may take a range of actions, or no action, based on the analysis and recommendations provided in the reports. Action could include making modifications to the courses of action proposed, such as adjusting percentages.

The President is required to make a decision on the steel recommendations by April 11, 2018, and on the aluminum recommendations by April 19, 2018.

Key Findings of the Steel Report:

  • The United States is the world’s largest importer of steel. Our imports are nearly four times our exports.
  • Six basic oxygen furnaces and four electric furnaces have closed since 2000 and employment has dropped by 35% since 1998.
  • World steelmaking capacity is 2.4 billion metric tons, up 127% from 2000, while steel demand grew at a slower rate.
  • The recent global excess capacity is 700 million tons, almost 7 times the annual total of U.S. steel consumption. China is by far the largest producer and exporter of steel and the largest source of excess steel capacity. Their excess capacity alone exceeds the total U.S. steel-making capacity.
  • On an average month, China produces nearly as much steel as the U.S. does in a year. For certain types of steel, such as for electrical transformers, only one U.S. producer remains.
  • As of February 15, 2018, the U.S. had 169 antidumping and countervailing duty orders in place on steel, of which 29 are against China, and there are 25 ongoing investigations.

Recommendations of the Steel Report:

Secretary Ross has recommended to the President that he consider the following alternative remedies to address the problem of steel imports:

  1. A global tariff of at least 24% on all steel imports from all countries, or
  2. A tariff of at least 53% on all steel imports from 12 countries (Brazil, China, Costa Rica, Egypt, India, Malaysia, Republic of Korea, Russia, South Africa, Thailand, Turkey and Vietnam) with a quota by product on steel imports from all other countries equal to 100% of their 2017 exports to the United States, or
  3. A quota on all steel products from all countries equal to 63% of each country’s 2017 exports to the United States.

Each of these remedies is intended to increase domestic steel production from its present 73% of capacity to approximately an 80% operating rate, the minimum rate needed for the long-term viability of the industry. Each remedy applies measures to all countries and all steel products to prevent circumvention.

The tariffs and quotas would be in addition to any duties already in place. The report recommends that a process be put in place to allow the Secretary to grant requests from U.S. companies to exclude specific products if the U.S. lacks sufficient domestic capacity or for national security considerations. Any exclusions granted could result in changed tariffs or quotas for the remaining products to maintain the overall effect.

What are we hearing in the marketplace?

As Manager of World Sourcing, Bill Feier works with mills, trade organizations and more. Here is what he is seeing and hearing in the market :

Steel prices are currently at a 7 year high. That makes it hard to blame imports for price erosion. Steel prices are up 30% from January 1, 2018.

China exported 50 million tons of steel in 2107 versus 150 million tons annually a few years ago.

This tariff play will effect pricing more than tonnage (foreign vs. domestic). In other words, they expect imports to keep coming in, but at a higher price, with allows the domestic mills to raise their prices (again).

Idled Furnaces.  The domestics are trying to figure out what to do about putting melt capacity back. It will take 12 weeks and $10 million to put a furnace back on line. They don’t want to do it if market demand settles after 1 or 2 years.

Between the Ashland and Granite City furnaces, the Big River ramp up, Stelco in Canada coming back on line, and around 10% of unused capacity at mini-mills, that 10 million tons of (domestic) annual capacity could come into our market which still leaves plenty of room for imports.

Due to past trade cases, there has been stagnant demand in the USA as manufacturers chose to import sub-assemblies or move fabricating plants outside the US.

The proposed tariffs have no time frame. They will stay in place until the president decides differently. The tariffs could disappear as quickly as they occurred. The tariffs on imported solar panel frames and washers and dryers (from Korea) have a 3-year limit.

7.5 million to 9 million tons of slabs get imported annually to ATI, AMUSA, CSI, NLMK, etc. Trump “probably” won’t tax these.

Tubers in the USA will most likely get hit the hardest with price increases.

Canada (the largest supplier of aluminum to the USA) and Mexico most likely will have limited exposure to tariffs.

Hot Roll prices are expected to hit $900 per ton by the 2nd half of 2018, but Timna Tanners of Bank of America expects pricing to come down to “reasonable” of $700 per ton sometime in 2019.

Auto industry:

There were 2.3 million auto industry jobs in 2000. 2.2 million jobs in 2009. 3 million jobs in 2017. These jobs need to be protected. The tariffs are a negative.

$3000 of every vehicle cost of production with 89% of it in steel and 11% in aluminum.  Tariffs might increase the unit cost by $150-$200. Automakers have 3-year rolling contracts so higher prices might not go totally into effect for 2 years or more. Automakers are global. They can manipulate their output and it might not benefit the USA.

Retail:

10% of the cost of making a washer or dryer at Whirlpool is steel. They agree on annual contracts so they will be somewhat protected from short-term price spikes. On the other hand, Electrolux announced they were shelving a $250 million expansion plan in the USA due to the tariff announcement.

Global view:

.1% (a tenth of one percent) of jobs in the USA are in steel and aluminum. Who cares? Other than creating a little inflation, the 232 case will not affect a significant percentage of jobs in the US. In 2009 Obama did the same thing with rubber tires imported to the US. It raised the price of tires, but the market absorbed it. Based on stock market reaction this week, Trump might soften his stance. There is also our NAFTA neighbors to consider.

As National Sales Manager, Jeff Terrell is in touch with many of our customer and has gotten their take on 232. Here are a few of their comments on what 232 might mean.

“Trump needs to re-think all this. There’s not enough capacity in the US to support the demand.  This absolutely could cause American companies to move their operations to another country and not face new tariffs on their products. This is totally opposite of trying to protect American jobs.”  – Mid-size OEM in the Midwest.

“The biggest concern I have is retaliation from other countries regarding trade.  Other countries could follow the US and claim that it’s a “national security” issue and cause serious international trade problems.” – Mid-size OEM in the Midwest

“Unfortunately, the announcement will only decrease any positive growth by raising cost for US manufactures. We all know there’s a major problem with China right now but the president should have had a more equal solution. Not every country is dumping steel in the US.”  – Large OEM in the Southeast

“Putting tariffs on steel imports is only going to raise prices and in the end is going to cost jobs. It’s shortsighted and benefit only the steel mills. The domestic steel mills have already raised prices because of 232. We’re going to get hit with higher prices regardless if we buy foreign or domestic. Maybe this could all work if Trump put a “cap” on domestic steel prices.” – Mid-size OEM in Texas

“We honor our contracts. Our profits are going to take a major hit because of these tariffs. It’s going to help all the steel mills but everybody else gets hurt. I heard there’s like 150,000 mill employees but over 7 million employees in manufacturing that use metal.”  – Mid-size OEM in the South East

“I feel the impact will be minimal because my product is farther downstream. From what I understand, the domestic steel mills have been unfairly taken advantage of for many years now. I feel the tariffs will help correct the situation and put everyone (foreign and domestic) on a more even playing field. Everyone wants to buy domestically and I think this will help.” – Small OEM Mid-West

“I feel like Trump’s heart is in the right place but he’s just doesn’t know the negative effect this could potentially have on manufacturing in our country. There’s NO WAY we can pass 25% price increases on to our customers. I think he’s going to rethink his announcement and not make it so broad. I sure hope so.” – Mid-size OEM in the Southeast

There remain a lot of specific details that need to be finalized before the “final” verdict is announced. There is certainly serious lobbying going on from countries and companies who want exemptions. We may be surprised when that final announcement is made. We’ll all find out this week, if and when the president officially signs the paperwork.

*Disclaimer: All observations and opinions expressed above are comments from individuals in the marketplace and do not necessarily reflect the opinions of Pacesetter Associates.  

 

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