Section 232 recommendations favor blanket measures against imports
On Friday February 16, US Commerce Secretary Wilbur Ross revealed what recommendations were made after the Section 232 investigation was complete. Three alternative remedies were proposed:
- a global tariff of at least 24% on all steel imports;
- a tariff of at least 53% on all steel imports from 12 countries (Brazil, China, Costa Rica, Egypt, India, Malaysia, South Korea, Russia, South Africa, Thailand, Turkey and Vietnam) with a quota by product on steel imports from all other countries equal to 100% of their 2017 exports to the US;
- a quota on all steel products from all countries equal to 63% of each country’s 2017 exports to the US.
The main aim of all of these measures is to increase the crude steel capacity utilization rate in the US from 73% in 2017 to an 80% operating rate. If implemented this year and assuming no changes in capacity, reaching 80% capacity means that US mills need to produce over 89 million tonnes of crude steel, an increase of 10% or 7.8 million tonnes; far outside the expectations of most forecasters before the recommendations were revealed.
If imports (including semi-finished products) are capped at 63% of last year’s volumes, this means that US steel imports cannot exceed 21.8 million tonnes, a reduction of 12.8 million tonnes. In terms of finished steel imports, which last year totaled 26.8 million tonnes, a 63% quota will lead to a reduction of 9.9 million tonnes of finished steel import volumes. The Department of Commerce (DoC) report estimated last year’s US steel demand at 107.3 million tonnes, which was probably an overestimate based on more recently available data. However, using this assumption, if imports are capped at 63%, US steel mills need to ship 90.4 million tonnes of finished steel to match 2017’s demand; an increase of more than 12%. Assuming we are correct that US demand rises further this year, by around 4%, they would need to increase local shipments to 94.7Mt, or 18%. Although US mills might not be so troubled by reducing their exports (circa 9.6 million tonnes last year) in favor of potentially higher-priced local markets, we struggle to see why the administration would constrain supply in an improving market. They would need reluctant blast furnace operators to restart capacity and quickly to stop the market from being short.
Looking at the 24% tariff scenario in the HRC market, in the 2010-2017 period it would have meant an average annual increase of spot import prices of $150 per tonne, exceeding US domestic prices during this period. With no competition from imports, it would have definitely lead to a rise in domestic prices of a similar extent, with a knock-on effect down the supply chain.
Interestingly, although the report acknowledges that US steel prices (with HRC used as a benchmark) were higher than other regions’ prices since 2010, it attributes this to higher taxes, healthcare, environmental standards, and other regulatory expenses in the US, even when imports come from countries such as Canada or EU member states.
The White House has until April 11 to make a decision, and it is not certain that it will follow DoC’s recommendations in full; and we doubt the quota will work in today’s market. We can expect that end users will increase pressure, following concerns that were raised during the investigation. For example, the Can Manufacturers Institute requested exemptions for tinmill products, while the Tire Manufacturers Association raised concerns about the quality of tire cord-quality wire rod produced in the US; the list can be continued.
There are also foreign policy implications to the proposed measures. The European Steel Association pointed out that 22 EU members are members of Nato, with additional bilateral agreements covering defense cooperation. Canada or Mexico, members of Nafta, are not exempt from protectionist measures in the current proposal, while Turkey and South Korea, political allies, are targeted by the proposed 53% tariff. China has already warned that it will take ‘the necessary measures to safeguard its legitimate rights’, and other countries are likely to look at retaliation measures as well, unless a more nuanced approach is adopted.