NEW YORK — Steel and aluminium producers are gathering in Washington, where President Donald Trump is expected to make an announcement on the government's Section 232 recommendations, which will impact every level of the global metals supply chain.
The administration is considering massive across-the-board tariffs and imports that could cover not only finished products but also semifinished goods such as blooms, billets and slabs.
The president tweeted on Thursday morning that "(o)ur Steel and Aluminum industries (and many others) 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!"
While US domestic prices will almost certainly spike, the impact on the domestic downstream industry and global steel and aluminium trade flows is murky. American Metal Market and Metal Bulletin reporters have been covering this topic from the start, providing all the analysis you need to make informed business decisions:
The steel mills are cheering on the president and have been consistent in their calls for "prompt, aggressive and lasting action."
US Commerce Secretary Wilbur Ross "has laid out options that have the potential to be meaningful and effective to address the threat the industry faces in light of global excess capacity and relentless steel imports,” Steel Manufacturers Association president Phil Bell said in a statement on February 16.
But there are those who believe that overly aggressive actions could inadvertently harm the steel mills that the Trump administration hopes to protect because it will lead to significantly higher raw material costs and steel shortages.
On the raw materials front, prices will move higher for everything from iron ore and ferrous scrap to coking coal and graphite electrodes, Russell Egge, founding partner of research consulting firm Egge & Alexander Associates, told American Metal Market on Tuesday February 20.
Meanwhile, Zekelman Industries executive chairman and chief executive officer Barry Zekelman warned that the imposition of a global steel quota with an across-the-board 24% tariff in a Section 232 order would be "catastrophic for manufacturers" because the domestic steel industry would be unable to replace all of that lost volume.
Prices off to the races
As might be expected, US hot-rolled coil prices have shot upward on the unexpectedly stiff Section 232 measures recommended by Commerce.
American Metal Market’s hot-rolled coil index stands at $38.65 per hundredweight ($773 per ton), up nearly 4% from $37.17 per cwt ($743.40 per ton) the prior week and up 26.7% from $30.50 per cwt ($610 per ton) a year ago.
Hot-rolled coil prices had not hit $38 per cwt since late June 2011. And some US mills - even if they have not officially announced higher prices - are now seeking $40 per cwt ($800), sources said.
Plate prices in the United States are at their highest point in more than three years and heading higher, while plate mills seek to keep a healthy premium over fast-moving hot-rolled coil prices amid the Section 232-fueled scramble for steel.
American Metal Market’s latest price assessment for cut-to-length plate stands at $42 per hundredweight ($840 per ton), up 5% from $40 per cwt ($800 per ton) previously and up 21.7% from $34.50 per cwt ($690 per ton) a year ago.
232 to dramatically shift trade flows
Millions of tonnes of material are likely to be redirected to steel markets outside the US if strict tariffs or quotas are levied on imports.
The US imported 34.47 million tonnes of steel products in 2017, according to US Commerce Department statistics.
Countries selling large volumes of steel to the US - including Brazil, South Korea and Turkey - are against the prospect of a US market sealed off by tariffs that could be as high as 53%.
The US imported 1.98 million tonnes of steel from Turkey in 2017, with cold-rolled coil, hot-dipped galvanized coil and rebar making up significant shares of those volumes.
If a 53% import tax were to be levied by the US on Turkish steel goods, it would “definitely stop Turkish exports into the country,” according to steel trade associations in Turkey.
Should Turkish mills lose that market, Turkish steel and scrap prices would come under downward pressure, sources said. Turkish rebar is already subject to US anti-dumping duties of 6.94% after a May 2017 investigation.
Will Canada be included for aluminium?
The proposed Section 232 remedies will reorganize the world’s aluminium supply chains by removing the US from the trade flow. But one of the biggest question marks in North America is what the White House will do about shipments of Canadian aluminium.
Canada delivered 2.46 million tonnes of unwrought aluminium to the US last year, accounting for 50.4% of all US imports under the 7601 HTS code. By comparison, Russia - the next-largest supplier - shipped 693,126 tonnes, representing only 14.2% of total imports of the product for the year.
Canada is part of the North American Free Trade Agreement (Nafta), which creates a duty-free trade bloc among the three countries. Under this agreement, Canada is able to send its aluminium from smelters such as Rio Tinto Plc’s Kitimat in British Columbia to cover for a natural shortage of primary aluminium in the US.
With the European Union-Canada Comprehensive Economic and Trade Agreement (CETA) in place, it may become more feasible for Rio Tinto to send its metal to Europe. The result of this shift in material would be a decrease in European metal premiums and an increase in US premiums.
But Canadian metal going overseas puts US consumers in an unfavorable position.
“We think it would take the US aluminium industry several years to get back on its feet, even with the help of the proposed import tariffs, and ready to more fully supply domestic needs from internal sources,” said Yang Cao, a senior analyst at Metal Bulletin Research.
Europe might find itself the destination of choice for metal that otherwise would have entered the US if Trump’s Section 232 decision leads to tariffs that create a barrier to entry by making it too cost prohibitive.
Producers in countries that have been favoring the US for its higher premiums - specifically, Russia and the Middle East, which constituted 33.3% of US total imports of unwrought aluminium in 2017 - would probably opt to redirect their metal to Europe if the US were to institute either a blanket tariff on imports or a mix of tariffs and quotas.
In particular, traders in Europe are worried about the recommended remedy of levying a 23.6% tariff on shipments from select nations, including Russia, China, Vietnam, Hong Kong and Venezuela. Such a remedy would cause the redirection of those shipments to Europe, they believe.
The global aluminium view
Chinese authorities were quick to respond to Commerce’s recommendations, calling them “groundless” and assuring onlookers that a trade war would certainly occur if they were implemented.
China is not a large source of primary aluminium shipments to the US, since the Asian country has a 15% tax on primary aluminium exports. But China is a source of semifabricated aluminium - originating from either China or other Asian countries - which is a major aspect of the Section 232 probe.
"Apart from [the] US, which was the largest destination of Chinese semis export, Chinese exports of semis were mainly to Southeast Asia, such as Vietnam, Thailand and South Korea,” Cao said. “So if Chinese exports cannot go to the US any more, the place with least resistance will be Southeast Asia.”
Meanwhile, even with a reshuffling of where metal is shipped, Japan - the biggest importer of primary metal in Asia - will remain a popular destination for aluminium.
Elsewhere, Brazilian buyers said that the expected increase in the US Midwest premium could cause those buyers to push for a renegotiation of their supply contracts.
Instead, the Brazilian premium could start to become more aligned with the Rotterdam premium, which according to one seller would link the Brazilian premium to “a global pool.”
Ali premiums spike on expectations, but backwardation weighs
American Metal Market’s latest assessment of the P1020 spot premium rose to 14-14.5 cents per lb, up 50.8% since the start of the year and at its highest level since early May 2015.
The US market has essentially been split into two camps, according to market participants. One camp believes that the president will enact the recommended trade remedies and that aluminium premiums will rise further in the short term. The other believes backwardation on the LME means market participants should transact business now - and even discount on spot premiums - before premiums fall.