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Tax cuts, 232 dash infrastructure hopes

Jun 21, 2018 | 02:57 PM | New York | Dom Yanchunas

The United States' long-anticipated national infrastructure investment is now unlikely to happen, stymied by President Donald Trump's other policy priorities including recent federal tax cuts and Section 232 tariffs.

In a development that would have seemed unthinkable a year or two ago, market participants have concluded that there will be no big federal infrastructure initiative for at least another year. Not totaling $1 trillion. Not totaling $500 billion. Not even totaling $200 billion.

Trump and Congress dug themselves into a funding hole when they passed the 2017 tax reform law that ballooned the federal deficit. Further challenging a large infrastructure commitment are Section 232's impact on the cost and availability of metals, a busier non-residential construction industry, unavailability of labor, immigration curbs and, now, rising interest rates. 

Scott Paul, president of the Alliance for American Manufacturing, acknowledged that Washington has turned its attention elsewhere while the nation's bridges, highways, water and sewage systems, and other vital public infrastructure crumble or become antiquated. 

"We're disappointed that a major effort to rebuild America's infrastructure has lost steam," Paul said. "It's apparently not a priority for this Congress or for the Trump administration, even though the needs are only growing."

Ned Hill, a professor at Ohio State University who teaches economic development and public finance, said states and municipalities will not be able to initiate many large infrastructure projects on their own because many of those governments are fiscally constrained, too. Hill said the approval of the federal tax cuts in December means there is not as much money available for a sizable infrastructure investment. 

"The tax bill killed it," Hill said. "Increasing taxes to pay for it is politically untouchable."

The Congressional Budget Office has estimated that the tax reform law will add $1.9 trillion to the US budget deficit. In March, Congress added $300 billion in new federal military and domestic spending. 

Hill said the steel and aluminium price increases resulting from Section 232 tariffs and other import curbs have exacerbated the barriers to achieving large infrastructure projects - mainly by increasing their price tags and introducing uncertainty. Borrowing also has become more expensive than in 2017, and interest rates seem to be pointing higher still. 

"With the tariffs, projects will be much more expensive, and overall risk is much higher," Hill said. "There is no way to know what the cost is going to be."

American Metal Market's pricing assessment for US domestic cut-to-length plate stands at $47 per hundredweight ($940 per ton), up 38.2% on the year. 

The American Institute of Steel Construction lobbied the House Transportation and Infrastructure Committee and the Senate Environment and Public Works Committee this year, to no avail, said Brian Raff, the institute's director of government relations. While some progress was made on funding for waterways and aviation, Trump's broader infrastructure proposal complicated the legislative effort. It included provisions that would indirectly weaken some Buy America guarantees. 

"There doesn't seem to be much of an appetite for transportation on the Senate side," Raff said. 

During the 2016 federal election season, both presidential candidates seemed committed to the infrastructure cause. Hillary Clinton proposed $500 billion in funding over a five-year period. Trump bragged that he would be doubly successful - talking about $1 trillion - but his plan would cover a 10-year period and would be mostly privately funded. Members of Congress said infrastructure enjoyed more bipartisan support than almost any other issue, and surely it would be one of the first areas of agreement when the election winners were seated in January 2017.

It took until February 2018 for Trump to introduce his plan, which by then topped out at a whopping $1.5 trillion. Instead of rejuvenating the conversation about infrastructure, the plan's unveiling actually took some steam out of the momentum when people realized that only $200 billion would be federal funds and the rest depended on state spending and private investment. Now the infrastructure dreams seem out of reach. 

Tom Teske, president of the Municipal Castings Association, said he didn't expect a large infrastructure plan to be passed in Trump's first year in office but certainly expected it in 2018. Now Teske thinks it could be achievable in 2019, after the new Congress is seated. 

"We need to come up with a public funding mechanism," said Teske, who is vice president and general manager of East Jordan, Michigan-based foundry company EJ Americas. "It would be nice to have some private funding, but that seems to be difficult to get."

Dan Hartnett, a lobbyist for the Association of Metropolitan Water Agencies, said the higher steel prices will put some of his members' capital projects in doubt. 

"Just like all the other steel users, they have to wait and see what the steel price will be," Hartnett said. "A steep increase in material prices will result in a possible stretching out of the project or putting the project on hold completely... A municipality [often] does not have the flexibility to increase the budget or get more money from the ratepayers." 

Steel associations should not give up on lobbying the president and Congress on the idea of a large infrastructure spending bill, said Chuck Bradford, steel market analyst and president of Bradford Research. 

"Infrastructure is still the best thing that could happen to the steel industry," Bradford said. 

While the promoters behind the Section 232 are shooting for 80% capacity utilization rates in the overall industry, Bradford instead suggests that they should have targeted their efforts at the lowest-capacity segments as the highest priority. An infrastructure bill would have helped. 

"What [Commerce Department Secretary] Wilbur Ross and the other folks completely missed is that different steel industries have different needs," Bradford said. Sheet-making utilization is already well above 80% but "what isn't is the steel used in non-residential construction - the rebar and the wire rods and the structural."

Trump's policies on taxes and regulation have stimulated commercial construction spending and private development of oil and gas infrastructure, according to market participants. Contractors are busy, not many construction workers are unemployed, trucking availability is tight and Trump has taken steps to discourage immigration that would enhance the labor pool. 

Therefore, those industries are too busy to cry out for more infrastructure spending at the moment, Hill noted.  

"We will have to wait for the next recession," Hill said.