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On March 8 President Trump signed off blanket 25% tariffs on steel imports, granting exemptions only to Canada and Mexico, and
later Australia. End users can apply for exemptions for those products where there is a lack of sufficient production capacity in the United States, and waivers can be given to certain countries. The European Union is actively seeking exclusions for its member states, and the list can be continued. If more exemptions are granted to a wide range of products and countries, the effect of tariffs might be minimal.

Since the US Department of Commerce (DoC) released its recommendations in mid-February, the flat steel price rally, which began in October, moved up a gear. By March 15, AMM hot-rolled coil index reached $835.60 per short ton ($921.09 per tonne), a record high since May 2011, up by 27% since the start of 2018. In contrast, cold-rolled and galvanized coil prices remained steady in February, and only finally moved up in the week ended March 9.

As the chart shows, US domestic HRC trades at a premium to the north European market, and since 2010 this premium averaged $80 per tonne. It can be sustained at over $120 per tonne, as we saw for much of 2014, when US demand was generally stronger than today, but anything above $170 per tonne was short-lived in the past. This suggests that either up to this price level US steel end users can remain competitive in the international market, and steel demand remain unaffected, or that such a wide arbitrage starts attracting imports, creating supply pressure. By mid-March the US HRC premium already climbed to almost $190
per tonne.

However, it seems inevitable that import prices must rise, external suppliers are largely capable of absorbing much of the duties in their own margins, which recently reached multi-year highs. A 13% rise in import offers should have knock-on effect on local spot prices, but with global prices under pressure, the US peak is likely to be reached soon.

Recommendations prepared by the DoC stated that the main aim of Section 232 measures was to increase the crude steel capacity utilization rate in the US to 80%. If achieved this year and assuming no changes in capacity, reaching 80% means that US mills need to produce over 88 million tonnes of crude steel, an increase of 8% or 6.30 million tonnes; far outside the expectations of most forecasters before the recommendations were revealed.

We estimate that last year US integrated producers ran at the average utilization rate of 67%, providing scope for an output increase, although restarting idled furnaces will take time and determination. EAF mills can ramp up production faster, but they already operated close to the DoC target rate, at 78% in 2017. And some mini-mills had even higher utilization, SDI at 92% and Nucor at 85% in 2017, limiting potential increases for those flat-rolled producers.

Re-rollers, however, are in a less advantageous position than steelmakers, as contrary to expectations of many, slab was not excluded from tariffs. The production cost of HRC from slab in the US is around $100 per tonne, according to the MBR Cost Service. Meanwhile, the HRC-slab price spread jumped above $300 per tonne in March. This means that when imported slab becomes subject to a 25% tariff under Section 232, US mills should be able to absorb it. A 25% increase of last year’s slab import price, even without a corresponding rise in HRC price, would still have led to an average HRC-slab spread of $114 per tonne, which is above the re-rolling cost.

Analysis by Alona Yunda, Metal Bulletin Research 

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