In March 2018, President Trump placed the 25% tariffs on imported steel and 10% tariffs on aluminum to help what he called the “dead” U.S. steel industry. Trump used his authority under Section 232 of the Trade Expansion Act, which required the Commerce Department to determine that the imports threatened national security.
Initially, Trump permanently exempted Argentina, Brazil, and South Korea from the steel tariffs and instead placed quotas on imports. Australia as also exempt, but without quotas. This year, he lifted the tariffs on Canada and Mexico.
While the tariffs removed some imported steel, it also initially increased prices. Increased production and prices led to significant financial performance improvement from domestic steel manufactures. This led to restarts of existing facilities and announced new capacity.
So, what has this meant for the U.S. steel industry and the US consumer? Has it helped or hurt us? Like most complicated issues, there are likely both benefits and costs. We are going to dive into what has happened and where we see the U.S. steel industry going.
Imports of steel mill products by volume were volatile in 2018 and year-to-date 2019. However, exports have remained relatively flat for the past 9 years. June 2019 saw the steel trade deficit at 1.3 million metric tons, a 0.2% decrease from May 2019.
Compared to a year ago, in June 2019 the gap in the steel trade balance narrowed by 8.7%. From May to June 2019, the volume of U.S. steel exports decreased to 543.2 thousand, down 5.0%. Year-over-year, June 2019 exports were down 34.5% by volume compared to 2018 and down 26.2% from three years ago.
Imports also decreased by volume, down 1.7% between May and June 2019 to 1.85 million metric tons. Imports for June were down 18.2% year-over-year and 27.7% from three years ago.
The tariffs did seem to work in terms of keeping imports low, but it appears to be more of a result of lower domestic prices. Buyers don’t need imported steel when domestic prices are lower. However, as prices increase, it is possible that buyers will find ways to import from countries not included on the 232 list. The tariffs only apply to about 30% of imports.
At the time of the tariffs, U.S. capacity utilization was at 73%. When Commerce Secretary Wilber Ross issued his report to Trump on his investigations into imports of steel and aluminum and his recommendations for tariffs, he said 80% capacity utilization was an important benchmark. The minimum rate that is needed for long-term viability of the industry is 80%.
The increase in prices due to the tariffs prompted capacity additions from major steel mills, including six new mills being announced since 2017 with a combined annual capacity of 7.2 million tons.
Average annual U.S. domestic steel capacity utilization has been trending up in the last two years. In June 2019, capacity utilization was estimated at 80.1%, down 0.7 points from 80.8% in May. However, it was up 2.7 points in June 2019 year-over-year and up 1.6 points from five years ago.
Still, even though capacity utilization has increased 39.3 points from the thirteen-year low in April 2009, it remains well below pre-recession averages.
Domestic demand for steel increased 2% from a year ago, but decreased 9% from five years ago. Yet, demand in June 2019 was 99% higher than in April 2009, the lowest level of demand in recent years.
As we look into 2020, the economic outlook is uncertain and increased mill capacity will apply downward pressure on pricing. However, if the new capacity provides the stimulus to shutter old and inefficient capacity, the US steel industry will become stronger. However, Wood Mackenzie, a global energy, chemicals, renewables, metals and mining research group, expects some growth in demand over the next couple years. The demand will be primarily driven by commercial construction and infrastructure.
The tariffs currently do not have an expiration date, it all depends on the 2020 election. However, removal of the tariffs could have a devastating effect on the overall U.S. market place.
Check out our Steel Supply Chain topic for more news on what is happening in the steel industry.
Tony Hammes, Vice President of Supply Chain, contributed to this post.