US President Donald Trump could inadvertently harm the steel mills that he hopes to protect with proposed Section 232 tariffs and quotas against foreign steel, industry sources warned.
The measure will almost certainly backfire if Trump places tariffs or quotas on semifinished goods such as blooms, billets and slabs, they said. The president has until April 11 to decide whether to impose imports, quotas or a mix of the two. And one thing is almost certain in the meantime: steel prices will go up sharply for better or worse.
How far will prices rise?
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.
“It’s entirely likely that raw materials will react quickly and dramatically. And scrap will probably react even more dramatically because it’s a more liquid market," he said, noting that this is what happened when former President George W. Bush imposed Section 201 tariffs on imports in 2002 and 2003.
The Bush administration rolled out its Section 201 safeguard in March 2002 and repealed them in December 2003.
In the early part of 2002, US hot-rolled coil prices jumped by 62.5% within three months - from $12 per hundredweight ($240 per ton) in the first week of March to $19.50 per cwt by mid-June, according to American Metal Market's pricing records. On the scrap side, Chicago No. 1 busheling prices jumped 29.6% from $89.50 per gross ton in March to $116 per ton in June.
The takeaway is that blanket measures such as the Section 201 and Section 232 are effective ways to spur steel prices higher. The problem is that doesn’t translate into improved operating profits, according to Egge. “Prices for raw materials will increase. Prices for steel will increase. But will [mill] financial performance increase? We don’t see it changing dramatically,” he said.
Will there be enough supply?
American Metal Market’s hot-rolled coil index currently stands at $37.17 per cwt. An increase of 62.5% would take prices to $60.40 per cwt, the highest level ever. The previous peak for hot-rolled coil was $56.25 per cwt in May 2008, before the 2008-09 recession.
And prices will go up and supplies might be squeezed even if Trump chooses targeted measures such as capping imports at 63% of last year’s volume, or 21.8 million tonnes, Metal Bulletin Research senior analyst Marina Maliushkina wrote in a research note dated February 19.
That more targeted option—US Commerce Department Secretary Wilbur Ross has also proposed blanket tariffs and quotas—means imports would be 12.8 million tonnes lower in 2018 despite an expected improvement in demand this year, she wrote. “We struggle to see why the administration would constrain supply in an improving market.”
US mills might be able to reduce exports—which were approximately 9.6 million tonnes in 2017—to serve a "potentially higher-priced local market," Maliushkina wrote. But that alone wouldn't be enough; "reluctant" blast furnace operators would have to restart idled capacity, and do it quickly.
Not if semis are targeted
“If semifinished imports and [North American Free Trade Agreement] relations are not ultimately excluded, we believe there could be long-term harm to the supply chain,” Keybanc Capital Markets analyst Philip Gibbs wrote in a research note on Monday, attributing this in part to semifinished supply agreements often being long-term “take-or-pay” deals.
The US imported 7.5 million tonnes of semifinished carbon and alloy products in 2017, up 27% from 5.9 million tonnes the previous year, Commerce Department data show.
And if Trump were to target semifinished goods, it is not clear where US mills would get the raw materials necessary to make replacement tons, Egge said, noting that it would take approximately six to 12 months to reopen or expand an existing mine on the Great Lakes.
“You are talking hundreds of millions of dollars if not more. And people will be cautious about spending large amounts of capital on what might be a short-term measure,” he said.
In the interim, the US could import iron ore from the world market but that additional supply would come at a price, given that it would either have to be brought into the Gulf Coast, where it would transferred from large ocean-going vessels to barges that would go up the Mississippi River; or the St. Lawrence Seaway, where it would be transferred onto narrower vessels capable of traversing Great Lakes locks, Egge said.
The real winners might be international pig iron producers that could see substantially increased US demand. “The pig iron guys are going to be really, really happy,” he said.
Such massive dislocations mean Trump probably won’t target semifinished products. Commerce’s initial suggestions were “intended to offer ‘shock and awe’ to our trading partners," Gibbs wrote. Trump will likely take a more “surgical” approach, perhaps aimed at oil country tubular goods (OCTG) and bar products - that would meet the needs of both mills and end-users.
Downstream worries about shortages
That's cold comfort to the downstream side of the industry, where concern is growing in some quarters about prices as well as the availability of certain steel items, sources said. US mills don’t make certain products or don’t make them in certain sizes, particularly when it comes to thin-gauge material that requires more mill time to roll, they noted.
Additionally, it will be hard for US automakers to compete - assuming they can source the parts they need - if they are paying substantially more for steel than their competitors in Europe and Asia, some sources said.
Lead times were already out to the third quarter for certain sizes of cold-drawn mechanical tubing before the Section 232 announcement, one master distributor source said, attributing this in part to imports that had already been limited by traditional trade cases and the fact that there is only one domestic producer of certain items, he said.
Cold-drawn tubing is necessary for hydraulic systems used by heavy-equipment makers such as John Deere and Caterpillar, the master distributor source said, and it's hard to see how the steel industry benefits if they suffer.
Even if exceptions are made for such products, it’s not clear how any version of the Section 232 that Commerce recommended could be implemented without leading to inflation in a US industrial sector that was already on stable footing and improving, the distributor source said. The Section 232 could add fuel to an inflationary fire that is already burning hot because of steep tax cuts and a potential $1.5-trillion infrastructure spending package.
The result is that it has already been hard to find skilled labor due to current low unemployment rates, and that problem will only become more acute. “The inflationary effects of this [Trump industrial policy] will be huge,” the master distributor source said. “And if you add this [Section 232] on top of it, we’re not headed down a very good path.”
Mills want action yesterday
The steel industry doesn't see it that way.
"We are grateful the Commerce Department has found that global steel overcapacity and the resulting surge of foreign steel imports is threatening our national security," the American Iron and Steel Institute, a leading steel lobbying group, said in a statement.
Politicians champion for the working class on the campaign trail but seldom stand up for them in office, Scott Paul, head of the Alliance for American Manufacturing, said in a statement. "We've now arrived at one of those rare moments when a politician can act decisively... We can't throw away this opportunity."
Editor's note: This article was updated on February 22, 2018, to correct the percentage change on Chicago No. 1 busheling prices between March and June, 2002.