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Neighbors' 232 freedom seen denting US prices

May 17, 2019 | 04:34 PM | Fastmarkets AMM staff

Tags  aluminium, steel, Section 232, tariffs, USMCA


NEW YORK — The United States' removal of Section 232 tariffs on imports of steel and aluminium from Canada and Mexico is likely to put downward pressure on domestic prices in the near term, market participants said on Friday May 17. 

“I am pleased to announce that we’ve just reached an agreement with Canada and Mexico,” President Donald Trump said Friday during remarks to the National Association of Realtors. “Hopefully Congress will approve the [United States-Mexico-Canada Agreement] quickly."

During a stop at the Stelco steel plant in Hamilton, Ontario, Canadian President Justin Trudeau said: “These tariffs were harming workers and consumers on both sides of the border. As we look at moving forward with the new Nafta, it didn’t make a lot of sense to continue to have tariffs on steel and aluminum between our countries.”

In a statement on Friday, the Mexican government confirmed that the tariffs were being removed, paving the way for the ratification of the USMCA. The government noted that the US and Mexico will implement measures to collectively prevent steel and aluminium dumping; establish a process to monitor steel and aluminium trade between them; and develop a consultation system.

Trump rolled out the Section 232 tariffs - 25% on steel imports and 10% on aluminium imports - in March 2018. Those tariffs were applied to Canada and Mexico, along with the European Union, on June 1, 2018, causing a major disruption in the US steel and aluminium markets, as well as markets around the world.


Aluminium

  • Most US market participants expect the Midwest premium to decline with Canadian supply able to enter the US duty-free.
  • Before the announcement of the agreement among the three countries, Fastmarkets AMM on Friday assessed the P1020 Midwest premium at 18.75-19.25 cents per lb. The premium shot to a multi-year high of 22-23 cents per lb in April 2018. The premium started 2018 at 9.4-9.5 cents per lb.
  • The Midwest premium is likely to drop 3 cents per lb over the next month, said one trader, who was expecting a gradual decline due to a knee-jerk reaction to the announcement.
  • The premium has the potential to drop by 5 cents per lb or more in the near term, since Canadian suppliers will try to bring metal in before the premium drops too drastically, a second trader said.
  • A third trader noted that US supply is abundant, so there is unlikely to be a rush of aluminium flowing in.
  • “Canada might ship all their aluminium into the US with no tariff, which would devastate and damage the Midwest transaction price in a material way. And then you would have flows of other material going into Canada that probably gets transshipped in,” a fourth trader said.
  • But a fifth trader expects the Midwest premium to stay roughly the same because the spread on the London Metal Exchange remains in a strong contango.
  • A Europe-based trader believes the removal of tariffs is bullish for the European primary aluminium market. European market participants expect metal to flow to the US rather than to Rotterdam.
  • The aluminium billet premium in the US will face even more downward pressure, with Canadians now able to ship billet to the US duty-free and minus seaborne freight costs, unlike some of their competitors. Fastmarkets AMM assessed the 6063 extrusion billet upcharge at 10-11 cents per lb - a 17-month low - on May 10. Prices for other value-added products are also vulnerable to declines, according to an extruder.
  • The North American aluminium associations released a joint statement, calling the removal of Section 232 tariffs a “major win.” “Removing tariffs, without quotas, is a major win for the entire industry and will support continued growth and investment throughout the region. We look forward to working with our governments to ensure that the implementation of this announcement guarantees robust, fair and rules-based trade of aluminium and aluminium products between our three countries,” the associations said in the statement.
  • The Coalition of American Metal Manufacturers (CAMMU) also praised the removal of the tariffs against Canada and Mexico. "We urge the Trump administration to terminate the remaining Section 232 steel and aluminum tariffs on our other trading partners as quickly as possible,” CAMMU spokesperson Paul Nathanson said in a statement. “These tariffs are damaging the US manufacturing sector, and particularly downstream US steel and aluminium consuming companies, by increasing prices and lead times for both domestic and imported steel and aluminium and making the US an island of high steel prices.”
Steel
  • “[The removal of the Canada and Mexico 232 tariffs] will definitely change the game,” a midwestern distributor said. “Exchange of goods and services between the countries that have not been there before will start flowing again.”
  • According to a second midwestern distributor, “It’s just going to put more downward pressure on price. We’re not buying now. We’re just staying away from the market - the people we talk to say there is room to lose another 15-20%.”
  • Prices will fall “even more” because of Canada in particular, since it is the largest US trading partner and is likely to provide more supply to the US, a West Coast distributor said.
  • A Canadian distributor source does not believe the US steel industry will be negatively impacted. “The first reaction in the US is going to be, ‘Oh my God, the Canadians are going to drop the price.’ …But the Canadian steel mills are desperate to raise the price; they want to get the pricing up to where the US price is.”
  • Fastmarkets' daily US Midwest hot-rolled coil index was calculated at $31.48 per hundredweight on Thursday May 16, up from $31.40 per cwt the previous day but down 1.5% from $31.96 per cwt a week earlier.
  • By contrast, Canadian HRC prices are below $27 per cwt, according to the Canadian distributor. "I see the price in Canada coming up, not down,” he said. “It’s going to be a big political issue in the next [Canadian] election... because we’re getting close to the cost of production... Canada couldn’t absorb all the hot-rolled coil that their mills produce - so they had to pay the 25% [tariff].”
  • The Alliance for American Manufacturing applauded the positive impact of Section 232 on the US steel industry, citing increased domestic output and capacity utilization, decreased import penetration and increased investments into US steel. “Global overcapacity is still a significant challenge,” AAM president Scott Paul said in a statement. “Congress and the administration must remain vigilant against dumping, circumvention and transshipment, subsidies, overcapacity and other challenges facing our steelmakers.”
Fastmarkets AMM staff



 

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