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Where the U.S. Steel Industry is Heading: Opinion

 

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.

Trade Balance

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.

Capacity Changes

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.

Looking Ahead

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.
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Section 232: What to Know

Section 232 is part of the Trade Expansion Act of 1962. It gives the president the ability to penalize imports if he decides they pose a threat to national security.

232 Recommendations are Nearing Delivery to the President

The Trump administration said it plans to take “major action” once it receives the U.S. Commerce Department’s report in its Section 232 investigation.

The president has 90 days to review Commerce’s recommendations. However, it is anticipated that he will announce his plan of action within weeks of receiving Commerce’s report. This could include imposing tariffs on top of the current anti-dumping and countervailing duties already in place or imposing quotas that will limit import volumes or a combination of both.

Commerce Delayed Anticipated Determinations

The U.S. Commerce Department modestly delayed its anticipated determinations and recommendations to consider the concerns that have been voiced by manufacturers. Most do not support a potential blanket ban on imports.”

Some manufacturers and trade associations expressed apprehension regarding the investigation’s potential to cut off vital suppliers, greatly effect domestic steel prices, and impact American jobs.

Many even requested that their product, nation, or supplier be excluded from the Section 232 investigation.

Section 232 and National Security Concerns

While Section 232 is framed with concerns of national security, it casts a wider net well outside solely what we would think of as national security matters (e.g., military-related materials or intelligence-sensitive materials). Interpretation includes jobs, job security, ability of metals producers to remain profitable and viable, etc.

Domestic steelmakers have urged Commerce to define “national security” broadly. They would like to it to include not only military goods, but also products used in roads, bridges, and other infrastructure. Mills also said their commercial viability is a matter of national security. If they aren’t profiting, they can’t afford to invest in the research that is necessary to develop future military-grade steel.

Commerce is expected to issue the report by the end of the month.

For more information about the Section 232 investigation, contact your local sales representative.

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Trade Case Toolbox: Trade Actions Available to Steelmakers

With news of trade cases filling steel industry media outlets it is important to understand exactly what a trade case is and the different trade actions the U.S. steel industry has available to it regarding international commerce.

In a previous post we discussed a brief background on steel trade cases as well as recent activity. In this post we will expound upon that by going into more detail about the different types of trade actions and provide another update on recent activity.

201, 232, 301, 332, 337. So, what do all these numbers mean?

Section 201

Trade Act of 1974

Section 201 allows domestic industries who have been seriously injured or threatened with serious injury by increased imports to petition the International Trade Commission (ITC) for import relief. If the ITC makes an affirmative decision it recommends a solution to prevent or resolve the injury and facilitate industry adjustment to import competition. The President makes the final decision whether to provide relief and the amount of said relief.

A 201 is probably the most commonly known trade action for steelmakers besides anti-dumping and countervailing duty cases.

Section 232

Trade Expansion Act of 1962

Section 232 investigations are used to determine the impact of imports on national security. Congress grants the President unprecedented authority to negotiate tariff reductions up to 50%. The Department of Commerce conducts an investigation on the imports and then makes recommendations to the President. The President then decides if he (or she) agrees and adjusts the imports.

Section 301

Trade Act of 1974

Section 301 is used to enforce trade agreements, resolve trade disputes, and open foreign markets to U.S. goods and services. It was designed to eliminate unfair foreign trade practices that have an adverse effect on U.S. trade. The President determines whether the alleged practices are unjustifiable, unreasonable, or discriminatory and burden or restrict U.S. commerce. If he (or she) decides action is necessary, the law directs that all appropriate action within the President’s power be taken.

Section 332

Tariff Act of 1930

The ITC investigates international trade, tariffs, and competition between the U.S. and foreign industries under section 332. The investigations and reports do not contain recommendations unless they have been specifically requested and do not provide a legal basis for other trade actions by the President.

Section 337

Tariff Act of 1930

The ITC, under section 337, determines whether there is unfair competition in the importation of products into the U.S. It declares infringement of a U.S. patent, copyright, registered trademark, or mask work to be an unlawful practice in import trade. It also declares that unlawful other unfair methods of competition and unfair acts in the importation of products in the U.S., the treat of which is to destroy or substantially injure a domestic industry, prevent establishment of such industry, or monopolize trade and commerce in the U.S.

Now that we have discussed the complicated part, here is a summary of the trade cases that have been filed. Final DOC and ITC anti-dumping and countervailing duty rulings:

  • ITC ruled in the affirmative the final determinations of anti-dumping and countervailing duties on corrosion resistant material for China, India, Italy, Korea, and Taiwan.
  • ITC also ruled in the affirmative the final determinations of anti-dumping and countervailing duties on cold rolled steel for Brazil, China, India, Korea, Japan, and the United Kingdom, but ruled to the negative for Russia.
  • ITC also ruled in the affirmative the final determinations of anti-dumping and countervailing duties on hot rolled steel for Australia, Brazil, Japan, Korea, Netherlands, Turkey, and the United Kingdom.
  • Preliminary determinations by both the ITC and DOC for stainless steel against China have been made with final determinations expected by January 2017.
  • U.S. Steel Corp., sought to have a Section 337 investigation by the ITC completed by Nov. 2, 2017, targeting Chinese mills back in August. It also proposed a single, 10-day evidentiary hearing on all claims in the case and no phased discovery process.
  • U.S. Steel Corp., gets 21-month time line for its Section 337 investigation targeting Chinese steelmakers.
  • The ITC found 14 Chinese companies are in default in the pending Section 337 investigation initiated by U.S. Steel Corp.

Contact your local sales representative or reference the ITC website trade.gov for more information.