“If the president signs a 25% tariff on imports under Section 232 this week or next week, hot-rolled coil prices in the US could rally up to $1,000 per ton,” Morgan Stanley Research analyst Piyush Sood wrote in a note dated Monday March 5.
Trump announced his preference for a global tariff last week and said he could put the duties into action as soon as this week.
232 price yo-yo
Tariffs would increase the price of foreign hot-rolled coil by $150 per ton ($7.50 per hundredweight) - enabling US mills to raise prices by the same amount or more when they open May order books, Sood wrote. Several US mills have closed April books but not yet opened those for May.
American Metal Market’s hot-rolled coil index stands at $800.60 per ton ($40.03 per cwt). A $150-per-ton increase would bring that number to $950.60 per ton ($47.53 per cwt).
But after an initial spike, prices are likely to decline, Sood noted, drawing parallels between the current market environment and that seen when Section 201 tariffs were enacted in March 2002 under former President George W. Bush.
In the early part of 2002, US hot-rolled coil prices jumped by 62.5% within three months, from $240 per ton ($12 per cwt) in the first week of March to $390 per ton ($19.50 per cwt) by mid-June, according to American Metal Market's pricing records. A similar increase this year would take prices to $1,301 per ton ($65.05 per cwt) – the highest level ever. The previous peak for hot-rolled coil was $1,125 per ton ($56.25 per cwt) in May 2008, before the 2008-09 recession.
But by mid-May 2003, hot-rolled coil prices had fallen back to $260 per ton ($13 per cwt) - roughly even with where they had been before the measures were enacted.
“A knee-jerk reaction followed by some slippage in 2018 appears well-supported by the market’s reaction in 2002,” Sood wrote. He also predicted that Section 232 tariffs - like Section 201 protections - “could easily last for 12 months.”
Whatever the duration of the measures, US Steel Corp “appears ready to restart” at least one of the blast furnaces at its Granite City Works in southern Illinois, according to Sood. US Steel expects it will take 12 weeks and approximately $10 million to restart the facility.
“The furnace will primarily produce slabs, in our view, since there may be a market shortage,” Sood wrote.
Granite City, which idled steelmaking operations in 2015, has two blast furnaces. The company did not respond to American Metal Market’s request for comment.
Meanwhile, AK Steel “may wait for more clarity” on pricing before restarting its Ashland Works, Sood wrote. AK’s Ashland Works also has been idle since 2015. The company has said it is too early to make a decision about restarting it.
California Steel Industries (CSI), which rerolls imported slabs, has warned that West Coast manufacturers could be harmed if slabs are targeted by the 232 and there remains no viable merchant market for them in the United States.
Steel wins, US allies and steel consumers lose
It’s not just CSI that stands to be hurt, but downstream steel and aluminium consumers as well, Goldman Sachs analyst Jeffrey Currie wrote in March 5 research note. That’s because a high tariff would create a “two-tier metal” market, with higher prices in the US than in the rest of the world.
US steel consumers would probably have to pay 25% tariffs on value-added steels, according to Currie. And, due to a “high level of policy and demand uncertainty,” US mills are unlikely to make the investments necessary to boost value-added production to meet domestic demand.
“A two-tier market is ultimately damaging to US downstream industries… as it creates an uneven playing field for US industries that face higher metal prices,” he wrote. Currie pointed to the motor vehicle and trailer parts sector, can manufacturing, and soft drink industries as especially vulnerable to the tariffs.
Trump might have been better off going with the targeted measures US Commerce Department Secretary Wilbur Ross had suggested - namely, a 53% tariff for 12 countries, plus a quota on all countries equal to their 2017 exports to the US.
“Global markets could have adjusted [to a more surgical approach],” Currie wrote. But the blanket tariffs, instead of being hard on China - whose excess capacity US mills have long lambasted - hit US allies such as Canada, Mexico and the European Union hardest.
And so, those measures “will create real economic and political dislocations,” he said. “This is the irony of the Section 232: A tariff intended to support US industry may end up boosting margins and investment for a small subset of producers while leaving the broader economy at a disadvantage via higher costs.”
Metal fabricators could lose jobs
Case in point: More than five downstream jobs could be lost for every one gained in steel and aluminium production, according to a March 5 policy brief for the Trade Partnership Worldwide. The brief was prepared by University of Bern economics professor Joseph Francois and by Trade Partnership president Laura M. Baughman.
Low-skilled workers in the fabricated metals sector would be particularly hard-hit, they wrote.
“While employment increase in sectors making steel and aluminium, it declines in every other sector of the US economy,” according to the brief. “Steel and aluminium tariffs would reverberate throughout the US economy in ways that will, on balance, reduce US employment.”
Baughman and Francois previously wrote a 2003 study on job losses that resulted from high steel prices following the implementation of Section 201 protections.
President Donald Trump’s proposed 25% tariff on foreign steel imports could drive hot-rolled coil prices to $1,000 per ton, helping US mills but hurting domestic steel consumers and the wider US economy, according to industry experts.