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Industry report, January 2017

American Metal Market explores how steel market participants are approaching this year and the new administration.

Donald Trump was never an ordinary candidate, and he certainly isn’t going to be a run-of-the-mill president.

Unpredictable and quick with an inflammatory tweet, the soon-to-be 45th U.S. president has promised to rip up trade deals, build walls and overhaul the nation’s health care system.

Unprecedented policy and economic uncertainty normally would be antithetical to growth and new capital spending, but the metals industry has taken a generally optimistic view of Trump and is ready to invest.

Prices are higher, and first-quarter order books are overflowing.

Meanwhile, executives have praised Trump’s plans for fiscal stimulus, corporate tax reform and deregulation.

We spoke to a few industry experts and asked them for their analyses and predictions:

The steel industry will have the ear of President-elect Donald Trump as his administration pushes through potentially radical changes to U.S. trade policies, according to experts.

And U.S. mills are likely to benefit from aggressive trade policies that could further limit steel imports and,
potentially, imports of other steel-containing goods such as passenger vehicles and appliances, they said.

Such policies are likely to boost profits at mills and spur hiring and capital expenditures, experts said. But what’s good for mills may not be good for the rest of the economy, some cautioned, noting that inflation could harm U.S. consumers if the Trump administration pushes arguably protectionist trade issues too far, too fast.


A STEEL TAKE

Philip Bell, President, Steel Manufacturers' Association (SMA)

“I think you have a zeitgeist in this country right now that says, if we want trade, we want it to be fair and to benefit American workers and American companies,” Philip Bell, president of the Steel Manufacturers’ Association (SMA), told AMM.

Steel and “fair” trade were key planks not only of Trump’s campaign but that of his Democratic rival, Hillary Clinton, Bell noted.

“It’s cause for optimism. But now you need to turn that political rhetoric into political reality. And it’s wait and see on that,” he said.

For starters, the domestic steel industry would like to see the Trump administration designate China and perhaps other countries as currency manipulators, Bell said. Such a move would allow U.S. trade officials to impose countervailing duties to the extent a currency is deemed to be devalued, he said.

Favorable energy prices or raw material prices are already considered to be subsidies against which countervailing duties can be assessed, Bell said. And there is no reason why an artificially low currency should not be countervailed in the same way—and no reason why the U.S. shouldn’t start implementing such duties soon, he said.

“There is some belief that this can be done under existing rules and regulations,” Bell said. “And it would be right in line with some of the president-elect's strong language on currency manipulation.”

The administration could also help the steel industry, and U.S. manufacturing in general, by “selfinitiating” trade cases, Bell said. Past administrations have typically left trade petitions up to private companies or unions to file. The problem is, that process is expensive and slow, he said.

A private company might take 12 to 18 months to gather data before filing a trade petition, Bell noted. And it may take the government at least that long to decide whether domestic manufacturers have been injured and whether duties should be imposed, he said.

But the government—whether the president, the speaker of the House or even the Senate majority leader—could initiate a case as soon as it saw market conditions deteriorating and “unfair” trade practices taking place, Bell said.

“(Self-initiation) has not been used a lot. And it has not been used recently. And that’s why we think there should be more serious consideration given to it,” he said.

And trade petitions under the Trump administration may not be limited to traditional anti-dumping and countervailing duty cases, Bell noted. There could be more anti-circumvention petitions filed resembling one targeting cold-rolled and coated flat-rolled steel from Vietnam, he said.

“Anti-dumping and countervailing duty cases don’t truly reflect the true amount of dumping and subsidization that’s taking place, so anti-circumvention cases are a nice way to supplement that,” Bell said. Besides, successful AD/CVD petitions have already been filed against many finished steel goods, he said.

What’s more, U.S. trade officials already have the tools to bring trade cases more quickly and aggressively thanks to the Enforcing Orders and Reducing Circumvention and Evasion (Enforce) Act signed into law last year by President Obama. The provisions of the act have not been implemented as forcefully to date as steel executives might like, partly because of “bureaucratic inertia” and a lack of cooperation with industry at times under the outgoing administration, Bell said.

The unsuccessful anti-circumvention petition filed by Wheatland Tube Co., a subsidiary of Chicago-based Zekelman Industries Inc., highlights such problems, Bell said. But similar roadblocks could “melt away” under the Trump administration, he said.

“Victory comes in stages. You may lose a battle or two before you win the war,” Bell said.


WATCH WHAT YOU WISH FOR: ANALYST

Philip Gibbs, Research Analyst, KeyBanc Capital Markets

Steel will be a “favored child” for the next four years and potentially the next eight under President-elect Trump, said Philip Gibbs, metals and mining equity research analyst at Cleveland-based KeyBanc Capital Markets Inc.

For proof, look no further than Trump’s cabinet picks: investor and steel industry veteran Wilbur Ross has been nominated to be Commerce Secretary and trade attorneys have been picked for other powerful roles in the administration. Robert Lighthizer, for example, has been nominated to be United States Trade Representative (USTR). He is a partner  in the international trade practice at Washington-based law firm Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates, and he has long represented Pittsburgh-based U.S. Steel Corp. in trade disputes.

Dan DiMicco, former chief executive officer, of Charlotte, N.C.-based Nucor Corp., headed Trump’s “landing team” for USTR. In a Jan. 11 e-mail to AMM, he said he will remain active with transition efforts through the end of the month.

At a minimum, the Trump administration will sustain the strong momentum the domestic industry has gathered through a string of successful trade case filings under President Obama, Gibbs said. And Trump could, as part of his tax reform package, not only slash taxes for U.S. companies but also impose value-added tax (VATs) on imports, he said.

VAT costs would come in addition to any pre-existing duties on imports, Gibbs noted. They would hit not only big-box stores that rely on imported goods but also steel consumers bringing rebar from Turkey, for example, he said.

The result: Prices could surge for steel products and consumer goods such as appliances, passenger vehicles—and even knick-knacks such as coffee coasters, Gibbs said. “It makes importing less fruitful and more costly, and that drives inflation because the United States is not set up to manufacture all the things we import,” he said.

The question now is not whether the trade landscape will change under Trump but whether the market has priced in just how drastically it could change, Gibbs said. “There is a lot more to think about right now in terms of the steel industry and the U.S. economy than I think there has been in quite a while, because the economy has been relatively predictable. But with radical changes, I don’t think you can say that you know how it’s going to turn out,” he said.

There is little doubt industrial companies, including steelmakers, stand to benefit, Gibbs said. What is less clear is whether what’s good for steel is good for U.S. consumers. “I think (Trump) means well in terms of the American people,” Gibbs said. “At the heart of what they are trying to do is create jobs. ... But consumer inflation is a by-product of that.”

It’s also important to keep in mind that the policies Trump might implement aren’t without precedent. The United States has implemented steep tariffs when the dollar was strong and oil prices were weak, notably in the 1980s and the early 2000s, Gibbs said.

“The unknown is how far this administration takes it,” Gibbs warned. “Because for every action, there is a reaction. And I don’t know that anyone has contemplated what the global reaction to this might be or that it might force (the Trump administration) to take more of a middle ground as time passes.”


A TRADER’S TAKE
John Foster, Chairman, American Iron and Steel Institute (AIIS)


The U.S. economy consumes approximately 120 million tons of finished steel annually, of which approximately 20 to 30 percent is imported, John Foster, chairman of the American Iron and Steel Institute (AIIS), told AMM.

That ratio doesn’t change dramatically whether times are good or bad, nor does the fact that approximately 20 percent of those imports are accounted for by domestic mills bringing in semi-finished goods—such as blooms, billets and slabs—from abroad, Foster said.

The incoming administration is likely aware of the importance of imports, even to the U.S. steel industry, given that Trump has nominated Ross to be his Commerce secretary, Foster said. Foster knows Ross from the former’s time at the old Jones and Laughlin Steel Co., which became part of Ross’ International Steel Group Inc.

“My view of Mr. Ross is that he is a pragmatic, logical and balanced manager with a deep insight into the strengths and weaknesses of the U.S. steel industry,” Foster said. “At the same time, he is a global man with global interests and a global understanding, which makes me believe he will support a balanced and reasonably unbiased approach to the free and responsible trade in steel.”

Ross’s nomination is a “hopeful sign” that Trump appreciates the complexity of the global economy, Foster said. And Trump, a businessman, likely understands the old maxim that a rising tide lifts all boats, he said.

What’s holding back the U.S. steel industry is not imports but a U.S. gross domestic product (GDP) that has risen a meager 1.4 percent per year since 2009, Foster said. Calls for an aggressive application of U.S. trade laws are a “Sirens’ song” that won’t boost growth and could prove perilous to domestic mills and to the consumer demand that drives the vast majority of U.S. GDP, he said.

“History has shown (aggressive trade measures) to be generally short-term fixes that ultimately hurt many in our shared customer base and (that) were not a cure for the fundamental general economic weakness in play; nor, with all due respect, certain inherent inefficiencies within parts of the domestic industry itself,” he said.

MICHAEL COWDEN
MCOWDEN@AMM.COM

For more industry news and analyses visit www.amm.com.

This content is provided by AMM Events for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.