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232 said affecting US automakers’ bottom line

Jul 25, 2018 | 05:37 PM | New York | Kirk Maltais


Automakers based in the United States are wary of the impact the Section 232 tariffs on steel and aluminium imports will have on their bottom line, industry executives and experts said.

Fiat Chrysler Automobiles NV (FCA) has felt some market pressure as a result of rising steel prices, company chief financial officer, chief operating officer systems and castings and head of business development Richard Palmer told analysts during an earnings call on Wednesday July 25. 

While the company has already locked in supply contracts through 2018 - which offer some relief from higher steel costs - the company is building into its 2019 outlook the commodity price increases that have followed President Donald Trump's Section 232 tariffs, 25% in the case of steel and 10% on aluminium products. 

“We will see an increase in 2019 [from] current prices, especially for steel,” he said. “The duties themselves aren’t the key issue, the issue is how these duties affect price.”

According to Palmer, FCA is able to utilize “duty drawbacks” to eliminate the duties' impact on the company's ability to move steel across North America. However, FCA is uncertain what the regulatory environment will look like going into next year.

While that commodity price flux is not currently a major drag on FCA's earnings, the company did cut its financial targets for the year. The 2018 guidance for net revenues fell to €115-118 billion ($134.4-137.9 billion) from approximately €125 billion ($146.1 billion) previously, and the forecast for adjusted earnings before interest and tax (Ebit) dropped to €7.5-8 billion ($8.8-9.4 billion) from more than €8.7 billion ($10.2 billion).

FCA chief executive officer Mike Manley - who assumed the position as a result of the ill health of former CEO Sergio Marchionne, who has since died this week - did not cite the 232 tariffs as the reason for the guidance cuts, but industry experts who spoke to American Metal Market indicated that the trade duties could harm the domestic automotive market. 

Both metal suppliers and consumers lacked adequate time to prepare for the tariffs, according to Christopher Kuehl, managing director and co-founder of Armada Corporate Intelligence. He argued that the uncertainty surrounding the duties has led to hesitancy from automakers.

“There’s really this feeling that we don’t really know why this tariff/trade war is being fought,” Kuehl said, explaining that Trump has signaled that the tariffs are intended to be a negotiation tactic rather than a permanent change to the status quo – meaning they could vanish from the market as quickly as they arrived, and cause metal supply issues in the meantime.

“The European Union is coming to Washington tomorrow to negotiate a deal on Trade,” hot-rolled coil index has risen by 38.9% since the start of 2018, closing at $45.32 per hundredweight on July 19.

Aluminium premiums have likewise shot up. The US Midwest P1020 premium now stands at 20-20.5 cents per lb – more than double the 9.4-9.5 cents per lb seen at the beginning of this year.

And Trump has maintained aggressive rhetoric when discussing global trade.

“Every time I see a weak politician asking to stop Trade talks or the use of Tariffs to counter unfair Tariffs, I wonder, what can they be thinking?” having a more strategic long-term relationship and working constructively and proactively instead of what we used to do in the past, and I think that that has been very, very beneficial for us when you think about… the opportunity to drive continued productivity,” Stevens said, adding that GM has been actively negotiating with suppliers to keep costs down.

Still, company executives largely declined to speculate on what the geopolitical climate will look like going into next year.

“The range of possibilities [on tariffs and the renegotiation of the North American Free Trade Agreement] is almost infinite when you look at how many moving pieces there are,” according to GM chairman and CEO Mary Barra.

“I think part of the unwillingness by automakers and suppliers to talk about the impact of tariffs on [their] bottom line isn’t so much underplaying as it is the uncertainty around the tariffs themselves... Is this just bargaining bluster at this point, or will the talk of additional tariffs actually turn into reality?,” David Zoia, executive director of content for WardsAuto, asked.

“The question overall on tariffs is: How much will get absorbed at the supplier level, how much can be passed on to consumers, and how much will go to the automakers’ bottom lines?” Zoia continued. “I’m sure all the automakers and suppliers are game-planning various tariff scenarios and sourcing options, but the uncertainty will make it much more difficult to pinpoint the severity.”

Ford Motor Co scheduled the release of its second-quarter results for 4:15pm New York time on July 25. Company executives were expected to comment on the effect of 232 tariffs on Ford's earnings, as well as the possibility of Trump implementing a 25% tariff on vehicles imported into the US from various countries.

Ford sold 1.23 million units in the US in January-June this year, down 5.6% from the first six months of 2017. FCA reported sales of 1.12 million units in the first half of 2018, up 4.5% in the same comparison.

Michael Roh, New York, contributed to this story.