To the Editor:
Since the beginning of the year, steel prices in the United States have increased dramatically in “anticipation” of Section 232 tariffs on steel imports. Concerns over reduced imports and potential shortages have resulted in panic buying by major steel-consuming industries (auto, oil and gas, construction and others) driving prices higher, and that occurred even before it was announced that these new tariffs would also be imposed on steel imports from the European Union, Canada and Mexico. We believe that the panic in the market will only increase in the short term.
What will the market look like in six months to a year?
We believe that prices in the US will continue to increase in the short term as steel imports drop for the next few months due to the implementation of the Section 232 tariffs. But we expect that by late summer/early fall, after a period of continued/accelerated panic buying, domestic prices will have increased sufficiently to offset the impact of the Section 232 tariffs and imports will return to higher levels and the market will stabilize, albeit at higher US domestic prices.
In 2002, when President George W. Bush did something similar (Section 201), imports dropped for three months, only to return to their historical trend levels as domestic market prices increased to a point that offset the additional tariffs.
Setion 232 winners
The US steel industry. This action by the President Donald Trump administration will be a major boon - in the form of an indirect subsidy - to the US steel industry. With artificially higher prices, the financial performance of the industry will improve. But it might not translate into significantly increased steel production or steel industry employment. With few exceptions, the cost and lead time to bring new or idled capacity online might limit the ability of the industry to significantly increase production. Furthermore, issues of limited availability of some raw materials (especially prompt scrap, iron ore and coke) could prove a constraint.
Section 232 losers
Steel buyers. It is important to point out that prices for steel are only expected to increase in the US, not the rest of the world. US steel-consuming industries will be at a competitive disadvantage in the global economy. They will likely face increased imports of finished goods into the US and they will be less competitive in the global market.
Other industries. International retaliation is expected to target everything from aerospace and farm products to technology and bourbon.
US consumers. Consumers are likely to face higher prices for steel-intensive goods such as automobiles.
US steel companies who expand capacity based on “new” higher prices: While this scenario is far from certain, we believe that it needs to be included because of the potential risks associated with major capital expansion programs based on new (some would say artificially) higher prices.
Whether as a result of a change in government policy or a ruling from the World Trade Organization (WTO) - the increased tariffs imposed by the Bush administration were in place for less than two years and were ruled to be in violation of US WTO commitments - it is likely that at some point Section 232 tariffs will be removed. Any new or restarted capacity will then be forced to compete based on global prices. Since much of the idled capacity had originally been closed due to lack of cost competitiveness, it is likely that the industry would feel the need to idle it once again. There is the very real possibility of significant waste of capital.
Impacts outside the US
We expect there to be minimal impact on those that export steel products to the US. While we do expect reduced levels of imports for a few months, we believe that, after that short period, steel imports will return to historical levels. Increased domestic prices in the US will more than offset the Section 232 tariffs.
In the event that reciprocal retaliatory measures spiral out of control, there is a very real risk of depressed international trade and a global recession.
Egge & Alexander Associates