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Steel awaits 232 specifics, potential reprisals

Mar 02, 2018 | 04:40 PM | Michael Cowden

Tags  Donald Trump, 232, WTO, Roberto Azevedo, US Steel, Granite City, AK Steel, Ashland Works Big River Steel


CHICAGO — President Donald Trump’s surprise announcement of across-the-board 25% tariffs on imported steel could provoke retaliation without bringing idled mills in the US back to life.

It could also give integrated mills a leg up on their mini-mills competitors, one industry analyst said.

Mini-mills are traditionally thought of as the low-cost producers on the US steel scene.

Despite such potential unintended consequences, the president has shown little sign of backing down from his position that draconian measures are needed to stop steel imports.

“We must protect our country and our workers. Our steel industry is in bad shape. IF YOU DON’T HAVE STEEL, YOU DON’T HAVE A COUNTRY!” the president tweeted on Friday March 2.

The World Trade Organization warned that US tariffs steel and aluminum imports - Trump is also seeking 10% duties on foreign aluminum - could spark a trade war.

“The WTO is clearly concerned at the announcement of US plans for tariffs on steel and aluminium,” WTO director-general Roberto Azevêdo said. “The potential for escalation is real. ... A trade war is in no one’s interests.

Trump has said he will sign an order putting the tariffs into action within the next week.

Capacity not increasing - yet
Good indicators of whether tariffs might bring steel jobs back are U.S. Steel’s Granite City Works in Illinois and AK Steel’s Ashland Works in Kentucky, industry sources said.

“We applaud the Administration for their announced plans to issue tariffs on imported steel, however it is too early for us to make any decisions about restarting operations, as we need to assess possible short- and long-term impacts,” an AK spokeswoman said in an email to American Metal Market on Friday.

U.S. Steel did not respond to a request for comment.

Granite City and Ashland Works have been idled since 2015.

Big River Steel, a mini-mill, also indicated that its expansion plans - the company has said it plans to double capacity - would not be impacted by any Section 232 outcome.

"Big River Steel, like all growth-oriented companies, continually evaluates market opportunities. Our focus is on the successful operations of our mill in Osceola, Arkansas. That is where our attention will remain for the foreseeable future," chief executive officer David Stickler said in a statement to American Metal Market on March 2.

Winners and losers
Tariffs could benefit some US mills while hurting others.

“This could have some serious unintended consequences,” said Russell Egge, founding partner of research consulting firm Egge & Alexander Associates, told American Metal Market on Friday.

It is not yet clear how many tons will be impacted by the tariffs given that the scope of the Section 232 action is uncertain. But prices for prompt scrap are likely to rise quickly if US mills - flat-rolled mini-mills, in particular - have to ramp up production quickly to meet increased demand, Egge said.

Prompt scrap, their primary feedstock, has become less abundant as mini-mill capacity has expanded, and generation of it is less elastic than that of obsolete grades. Scrap alternatives such as direct-reduced iron and pig iron over time could alleviate any spike in prompt scrap prices. But an increase in virgin iron alternatives won’t happen overnight, Egge said.

The result: “The cost to produce a ton of steel in an [electric-arc furnace] mill could increase, and it could increase dramatically,” he said.

Integrated mills have more control of their production costs because two of three major integrated steelmakers in the US own their own mines and because, on the scrap front, they use obsolete grades that are collected in greater volume when prices are higher, he said.

The script that mini-mill steelmakers are the low-cost producers in the US could therefore be flipped. “We could see a reordering of the steel industry. … The cost curve has pretty much flattened out, and this could create an inversion of it,” Egge said.

Chaos reigns in Nafta and abroad
It’s too early to jump to any conclusions until the Trump administration reveals specifics of the Section 232 penalties, Steel Manufacturers Association president Philip Bell told American Metal Market on March 2. The SMA is a trade group that represents domestic mini-mill steelmakers.

The global steel industry market, and anyone making grand predictions, should in the meantime put the hot rhetoric on ice." Bell said.

“I think we have to wait and see the details emerge and, until we have those, it’s premature to talk about trade wars,” he said.
  
“We’re pleased that the president has taken a bold and decisive position on the 232, and we look forward to seeing the final details next week,” he added. “It’s important to note that whatever the final remedy proposal, we’re certain it will have a very structured exemption and exclusion process.”

One country that should be granted an exemption is Canada, the United Steelworkers (USW) union said.

“The evidence is clear that Canadian steel and aluminium imports are not part of the problem that the US administration is trying to address,” Ken Neuman, the USW national director in Canada, wrote in a March 2 email. Slapping tariffs on Canadian exports would hurt both countries' economies and cause job losses on both sides of the border.

Neuman’s comments echoed those of USW International president Leo W. Gerard a day earlier.  “Canada is not the problem,” Gerard said in a statement. “Any solution must exempt Canadian production.” Not only are the US and Canadian manufacturing sectors linked, so too are their defense and intelligence agencies.

Trump is invoking the Section 232 tariffs on national security grounds.

US large diameter line pipe producers, however, want no exemption for Canada. "There have been reports that Canada could be excluded from Section 232 relief. Doing so would dangerously weaken the effectiveness of your action," the American Line Pipe Producers Association wrote in a letter to the president dated March 2.

Waiting for the next shoe to drop
“Everybody is in wait-and-see mode,” one steel buyer said. And that’s equally true on the mill side, where producers aren’t quoting farther out than a day.

“That’s if they have spot tons available - and, again, that’s a big if,” he said.

That sentiment was echoed by a service center source. “How high is hot-rolled coil going to go? I would say $900 [per ton] is already in the bag. And $1,000 [per ton] is a pretty sure bet, too.”

American Metal Market's hot-rolled coil index stands at $800.60 per ton ($40.03 per hundredweight). Hot-rolled coil prices have not hit $900 per ton ($45 per hundredweight) since April 2011 and have not touched $1,000 per ton ($50 per cwt) since September 2008 - preceding the onset of the Great Recession, according to American Metal Market's Price Tracker.

If prices continue to rise at their current rate - especially on the West Coast, where prices are higher than they are east of the Rocky Mountains - traders could resume regular shipments even with 25% tariffs in place, the service center source said. And material ordered now could arrive as soon as June. But it’s too early to say what might happen next week let alone by this summer, he said.

“This is typical Trump shock and awe,” he said. “He likes dropping bombs and then sitting back and seeing how people react.” The service center source suggested staying tuned to the stock market in the meantime, because the president is probably watching it closely, too.

Steel shares were mixed in afternoon trading on Friday amid another triple-digit plunge for the Dow Jones Industrial Average.

Michael Cowden
mcowden@amm.com



 

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