Revenue garnered from the United States' Section 232 tariffs - in place for almost a year - stood at $4.3 billion for steel and $1.4 billion for aluminium as of Thursday February 21, 2019, according to data from US Customs and Border Protection.
While the blanket 25% steel tariffs imposed by President Donald Trump's administration has helped US steel mills reap record profits, restart idled capacity and expand new projects, it has also resulted in rising supply chain costs across various sectors.
US importers have been forced to pay additional taxes on roughly $23 billion in steel imports, according to the recently introduced Bicameral Congressional Trade Authority Act of 2019.
But there are some ways that companies can better manage trade under Section 232, sources told Fastmarkets AMM.
Vietnam takes duties in stride, quietly builds market share
Vietnam, not a traditional supplier of flat steel products to the US, has quietly been making inroads into the US market since the Sections 232 tariffs were imposed.
While Canada and South Korea remain the top suppliers, US flat steel imports from Vietnam rose to 781,760 tonnes last year, up by 79% from 436,850 tonnes in 2017, International Trade Administration data show.
The Section 232 tariffs have caused traditional suppliers to pull back from the US market.
Countries such as China, Japan, Europe, Mexico and Canada are subject to 25% Section 232 tariffs, while imports from South Korea, Argentina and Brazil are locked in at certain volumes under quota agreements. This has given Vietnam an opportunity to step in, industry participants and legal experts said.
Vietnamese suppliers are willing to sell flat products below cost for now to gain US market share in the long run. For example, basic hot-rolled commodity grades that were priced at $800 per tonne would be offered by Vietnam at $600 per tonne or even lower, potentially attracting more buyers.
Moving upstream – an expanding slab market
Rather than go downstream for a finished product to avoid tariffs, the other option is to go one or a couple of stages upstream.
An importer needing HR product, for example, can instead import slab and run it through a re-roller to get the final product. There is excessive rolling capacity in the US, particularly with a slowdown and price decline in the HR market. The advantage is that the customer can pay the 25% tariff on a lower dollar-per-tonne input cost.
Fastmarkets AMM’s daily US Midwest HRC index was calculated at $34.61 per cwt on March 15, down by 1.4% from $35.09 per cwt the day before and off 0.8% from $34.90 per cwt a week earlier. The price had hit a nearly decade-high of $45.84 per cwt in early July of last year.
Fastmarkets’ weekly assessment of the Brazilian slab export price reached $500-540 per tonne fob on March 15, unchanged from the previous week but up from $490-530 per tonne fob at the end of February. The price had hit a 12-month high of $600-610 per tonne fob in mid-April of last year.
Similarly if a customer needs to roll cold-rolled or galvanized product for automotive applications, it can import HR and re-roll it in the US or it can import slab.
US slab imports averaged about 5 million tonnes per year from 2015-18, with Brazil the top supplier, US International Trade Commission data show.
And the Section 232 tariffs have helped this market expand, industry participants and trade lawyers said.
Semi-finished steel imports, slab being the majority, have steadily gained market share since 2015, comprising 39% of total imports in October 2018 - the highest level in more than 20 years - and 23% of total imports last year as a whole.
All five major slab converters in the US– AM/NS Calvert LLC, Evraz North America, JSW Steel (USA), California Steel Industries Inc and NLMK USA, last year submitted requests for exemptions from the Section 232 tariffs on imported semi-finished goods. In late February, the US Commerce Department denied CSI’s exemption request for slab imported from Japan, Brazil and Mexico, as well as Evraz NA’s request to exempt Russian semi-finished goods.
Going downstream - fabricated products moving offshore
Companies buying steel to make finished products, such as filing cabinets, have also started shifting production abroad in reaction to the Section 232 tariffs.
One example is in thick wire rod, for which the re-rolling business is moving offshore and the final product then shipped to the US.
Freight costs would typically be a barrier to this scenario, but it becomes more economical when factoring in the 25% Section 232 tariffs on steel.
While this transition takes time, it is nonetheless under way in some segments of the industry, legal experts said.
“It changes the math which drives people to shift what products they are shipping. But that change takes a little time as industries do not just react immediately,” one trade lawyer said.
The Trump administration is fully aware of this shift and is mulling whether to expand Section 232 to downstream products, legal experts in Washington said.
Swap deals under Section 232
Companies can also blend their imports from tariffed countries by doing swap deals with countries having agreed quotas, although legal experts caution that only companies with operations in multiple countries can manage that well.
Cost sharing, bonded warehouse
Cost sharing is another common way to manage the Section 232 tariffs, especially for commodity-grade steel items such as HR, CR and coated steel. In some cases, companies are evenly split with a 50:50 share.
For value-added or downstream products, such as pipe and tube, cost sharing might not always work. One example is the US pipeline market, which is booming due to new fracking and natural gas projects. Importing steel pipe when there is a set delivery schedule could involve huge financial penalties if deliveries are missed. So in this case, the customer might have to shoulder the 25% tariff so that the steel pipe can arrive on time even if the contract was negotiated the prior year and prices are much higher at the time of shipment.
Fastmarkets AMM's monthly assessment of US import X52 line pipe stood at $1,090-1,250 per short ton cif port of Houston on February 26, up from $900-$930 per ton at the same point last year, and that for US domestic X52 line pipe rose to $1,200-1,260 per ton fob mill from $1,100-$1,125 per ton in the same comparison.
Utilizing a bonded warehouse can also help companies tackle Section 232 by slowing the impact of the tariff and changing the value of the sale.
Duties on merchandise in a bonded warehouse aren't paid until it is removed, and goods can be kept there for up to five years. So importers with large inventories can use that as a mechanism to manage cash flow problems.
“What some of these companies are doing is putting everything in there and only taking out what they absolutely must take out to serve their customers, and hoping and praying that soon enough the tariffs will be lifted and then they can ultimately release the goods,” a second trade lawyer said, noting that quotas can quickly fill up on tight categories.
“The goods are on the water, and then the quota fills, they are stuck. The only thing they could do is either to export it or put it in the bonded warehouse, sit it out and wait for the quota to reopen, so that’s your possibility there,” this trade lawyer added.