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CHQ supply chain rattled by 232 tariffs

Aug 29, 2018 | 04:51 PM | New York | Patrick Fitzgerald


Buyers and distributors of cold-heading quality (CHQ) steel wire rod in the United States intend to pass increased product costs along to downstream customers, they said, with some reporting difficulties in securing stable supplies due to the 25% Section 232 tariffs on imported steel.


Pre-Section 232 tensions now a reality

The supply chain had been distressed by the possibility of tariffs being implemented before they were announced by President Donald Trump on Thursday March 1.

Additionally, tariff-related problems - the inability to source enough material or accurately forecast prices - have worsened since the tariffs were expanded to include Canada, Mexico and the European Union on June 1, according to market sources.

Canada shipped 50,108 tonnes of CHQ steel to the US from January to June of this year, according to figures compiled by American Metal Market from US Commerce Department and International Trade Commission data. Japan was the only other country to export CHQ product to the US thus far this year, at 2,018 tonnes. While figures for July and August were not available as of August 29, these CHQ volumes stand to be impacted by the Section 232 tariffs.

Supply and mill capacity debated
The majority of foreign CHQ wire rod - primarily used for automotive applications - comes from Canada. ArcelorMittal Canada and Ivaco Rolling Mills are two of the largest Canadian producers of the product.

The imposition of the tariffs against Canadian steel is constricting supply of the product in the market, one CHQ buyer said, expressing doubt that domestic mills would be able to make up for the limited amount of CHQ coming from Canadian producers. “[Domestic mills] are not going to be able to pick up the slack,” he said.

A second CHQ buyer said that while the tariffs have yet to affect his ability to obtain product, he suspects that will change once the market tightens.

“Domestic mills can’t fill that gap, and they never will,” he said, agreeing with the first buyer that domestic mills will not have the ability to increase production to make up for any potential tightening in the CHQ market. “Domestic mills don’t have the capacity.”

Producers of CHQ wire rod with US operations, such as Charter Steel and Liberty Steel, declined to comment.

But a distributor of CHQ pushed back on talk that domestic mills can't make up for a lack of CHQ from Canada. “The trouble is buyers who typically [purchase] domestic and want to buy more can’t get access to that excess volume, and then they have to source from an outside producer,” he said.

This distributor contended that if those buyers chose a Canadian mill at the end of the 2017 contract year, then that means a mill based in the US did not put these buyers into its production schedule. “If you don’t have a domestic source, then you have to go with a Canadian source and pay the 25%.”

A third CHQ buyer offered a different take. “Mills are fairly busy, even the Canadian guys,” he said. “I haven’t heard issues with mills going back on commitments yet, which is always an indicator of whether we’re going to have to significant supply constraints.”

While this buyer does not think the CHQ market is hurting in terms of supply, he nonetheless does not believe that there is unlimited availability of CHQ. “The domestic mills aren’t giving you any more,” this source said. “They’re rationing what they put out into the market... you get what you get and the rest of it we’re having to pull out of Canada.”

From his standpoint, the third CHQ buyer said the biggest impact from the tariffs is the cost of sourcing from Canada rather than a tightening in supply. “The dollars are huge,” he said. “At this point we are getting what we need as far as steel but we’re having to pay for it.”

Downstream impact: Customers explore options

Market participants sourcing CHQ from Canada now face the twofold dilemma of whether to pay the additional 25% tariff to obtain steel, and whether to mitigate that increased cost by passing it on to customers.

Since the tariff announcement, American Metal Market’s assessment for cold-heading quality wire rod rose to $42.75 per hundredweight on August 22 from $37.50-$38.50 per cwt on March 1. The assessment for industrial quality low-carbon wire rod, a benchmark wire rod product, has jumped to $39.25-$41.25 per cwt from $32-34 per cwt in the same comparison.

The first and second CHQ buyers noted that their companies would pay the tariff to import CHQ from Canada and would pass the increased cost along to customers when they do so.

“At some point it’s going to be passed on to the customer and there’s nothing we can do about it,” the second CHQ buyer said.

Clients are now exploring other outlets to purchase finished goods at a cheaper price than what they are paying for CHQ, along with the cost of manufacturing CHQ-dependent components, the first CHQ buyer said when asked how customers have responded to the prospect of rising costs.

But this source was adamant that domestic and Canadian prices, with freight included, are still the best options available to the market.

A trader agreed, noting that customers are unlikely to find better options from overseas suppliers if they are seeking to buy finished fasteners. “They’re going to have a rude awakening,” he said.

Not only has the cost of imported CHQ-dependent fasteners increased, but customers will be looking at lead times of 26-28 weeks for material from Taiwan should they go that route, he added.

“People don’t know what to do at this point,” the trader said.

Relief in sight?
When the tariffs might be removed is the lingering question for market participants along the CHQ supply chain. “I think this will get resolved with Canada in particular,” the first buyer said.

Recent developments seem to underscore that buyer’s optimism. Discussions aimed at replacing the Section 232 tariffs with import quotas took place between US officials and representatives from the Mexican steel industry on August 23.

On August 27, Trump announced that the two countries had struck a new bilateral trade agreement, paving the way for Canada to re-enter negotiations.

If a deal can be secured between the US, Mexico and Canada on a revamped Nafta or similar trade accord, that would likely bring a resolution to the Section 232 tariffs.

Canadian officials stand ready to remove its retaliatory tariffs on US exports to Canada, Canadian Steel Producers Association president Joseph Galimberti said. “One thing I can say with confidence is that if the Trump administration were to eliminate the 232 tariffs on Canada, the Canadian government would move immediately to rescind the retaliatory tariffs in likely the same day,” he said.