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232 tariff on Canada won't last long: US mills

Jun 08, 2018 | 05:13 PM | New York | Dom Yanchunas

Tags  Nafta, Section 232, tariffs, steel imports, Donald Trump, Dom Yanchunas

Most US steel mills are not yet factoring the Section 232 tariff on imports from Canada into their pricing or strategies because there is skepticism over whether the tariff will stay in effect for long.

Market participants surmise that US President Donald Trump imposed the 25% steel tariff on Canada and Mexico as a bargaining chip to wrench the two countries out of the trilateral North Amercan Free Trade Agreement (Nafta) and instead forge a pair of bilateral pacts. In those new deals, the United States would be tough on Mexico, but there's no substantive reason to keep the steel tariff on Canada. 

"It's a ploy. All Trump wants to do is blow up Nafta, and that's going to be soon," a US mill source said. "The tariff is not going to last."

The Trump administration confirmed the imposition of Section 232 tariffs on Canada, Mexico and the European Union in an announcement on Thursday May 31. The decision surprised many market participants who wondered how imports from those close military allies could possibly have a detrimental impact on national security. 

Canadian producers who sell into the US had varying reactions to Trump's move. Atlas Tube has promised to pay the tariff for its US customers. Welded Tube of Canada said it needed to add a 25% tariff surcharge

The tariff on imports from Canada was also expected to harm the competitiveness of Evraz North America's Canadian operations at a time when the Chicago-based company is already stressing over the US' anti-dumping case against large-diameter pipe from six nations including Canada, as well as other cross-border disruptions implicit in Section 232. While there is anecdotal evidence that one or two US competitors have raised asking prices on certain sizes of large-diameter line pipe in June, the US mill source said rising substrate costs were a bigger factor than any doubts about deliveries from Evraz. 

On steel products ranging from tubing to sheet, companies on both sides of the border supply various sizes and grades that sometimes cannot be easily sourced purely domestically. Even with the Section 232 tariff putting Canadian mills at a price disadvantage for an unknown period of time, they will still want to serve their longstanding customers as best they can, according to a northern distributor who buys steel from both countries. 

"I don't think it's going to change the flow. Those tons have nowhere else to go," the northern distributor said. "The [Canadian] mills may be able to absorb the tariff and still make money" because overall prices have risen so much. 

The fact that Trump took the "silly" measure at all, the same northern distributor said, might afflict steel market participants with some heartburn over whether the tariffs against Canada could remain in place longer than people are expecting. Canadian Prime Minister Justin Trudeau has signaled that he does not favor a bilateral deal and has rejected some US preconditions for further talks, that distributor noted. 

The same buyer recalled that antagonizing Canada was not part of presidential candidate Trump's promises to the American voters, who probably also weren't yearning for retaliatory tariffs on US exports. 

"Was the theme of the campaign to put steel tariffs on Canada? How did this narrative get lost? It was China. It was Mexico," that distributor said. "The economic and trade effects are much broader than just the steel and aluminium now, and for what? ... It's much bigger now than crowning Nucor grand champion of the steel industry."

Therefore, the US-Canada aspect should not be hard to resolve in relatively short order.

"I doubt we'll be talking about this in three weeks' time," the northern distributor said. "If we are talking about it in three weeks, I think we'll be talking about it in three months' time."

Even if the tariff on Canadian-made goods disappears soon, it still may have a lingering impact on some Canada-based suppliers. A tube mill source in the southern US confirmed that it is talking with customers of Canadian tube mills to offer replacement material. That US mill will try to cement the relationships possibly to become a regular supplier even after the Canadian material flows freely again.

Service centers are generally open-minded about the idea, said one East Coast distributor who buys material from both countries. The pricing calculation will depend a lot on geography. For a buyer in the northeastern US, the eastern Canada tube mills are closer than southern US tube mills are. 

"The freight is going to be the issue," the East Coast distributor said. 

The East Coast distributor said the Canadians have more to lose in any breakdown of trade relations with the US. Canada likely would return to the bargaining table soon, ready to offer some concessions. There is reason to believe that the process will take longer than expected, however. With a redo on Nafta a priority for Trump from Day 1 of his administration, the fact that it hasn't been achieved 17 months later is a bad sign, that distributor noted. The talk among the steel mills is that there are no back-channel discussions between US and Canada trade officials that may lead to a breakthrough. 

The simmering dispute "hurts both" countries, the East Coast distributor said.

"Things are going very slow," that distributor said. "Everybody's hoping that it's not going to last long, but I think we're going to be in this for at least another month - and more like two or three months."


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