SECTION 232 WRAP: US import tariffs could wreak havoc on trade flows in other markets
Millions of tonnes of material are likely to be redirected to steel markets outside of the United States if US President Donald Trump levies strict tariffs or quotas on imports after the Section 232 investigation.
While US domestic steel prices are expected to spike if the US Department of Commerce’s 232 recommendations lead to trade defense measures, there are two schools of thought as to how this might affect steel prices outside of the US.
On the one hand, sources from Europe, Turkey and Southeast Asia warned Metal Bulletin that if US tariffs or quotas lead to a drop in export demand and an oversupply in non-US steel markets, that could have a negative impact on global steel prices.
On the other hand, while tariffs may squeeze the margins of foreign mills exporting to the US, rising demand in global steel markets this year could cushion any price drops to other markets, according to Alistair Ramsay, research manager at Metal Bulletin Research.
After delivering his department’s report on the Section 232 investigation to Trump last month, on Friday February 16 US Commerce Secretary Wilbur Ross confirmed three recommended trade actions - intended both to reduce US steel and aluminum imports and to raise domestic production of those materials.
The proposals include:
Trump has until April 11 to decide which measures, if any, he will take in the steel 232 case.
The United States imported 34.47 million tonnes of steel products in 2017, according to US Commerce Department statistics.
Should trade defense measures be applied and US domestic steel production raised to make up for the shortfall of import material, US mills expect less foreign steel in their domestic markets, which is likely to make importers redirect material into export markets outside of the US.
The US markets for steel products such as rebar are in bullish moods even before any measures have been applied. American Metal Market’s price assessment for US domestic rebar rose to $640-660 per ton fob mill on Wednesday February 21, up by $20 per ton week on week, with the Section 232 recommendations bolstering mill sentiment.
Despite the recommendations being a clear positive for US prices, steel industry participants elsewhere in the world shared gloomier market outlooks.
Exporters could lose margin, business
Countries selling large volumes of steel to the United States - including Brazil, South Korea and Turkey - are negative toward the prospect of a US market sealed off by tariffs that could be as high as 53%.
The United States imported 1.98 million tonnes of steel from Turkey in 2017, with cold-rolled coil (CRC), hot-dipped galvanized (HDG) coil and rebar making up significant shares of those volumes.
If a 53% import tax was levied by the United States on Turkish steel goods, it would “definitely stop Turkish exports into the country,” according to steel trade associations in Turkey.
Should Turkish mills lose that market, Turkish steel and scrap prices would come under downward pressure, sources said. Turkish rebar is already subject to US anti-dumping duties of 6.94% after a May 2017 investigation.
“Steel and scrap prices may fall sharply unless Turkey cuts production at very high rates. The US was the last market for Turkey, into which they were selling at high tonnages,” one Turkish mill source said.
Turkish rebar exports to the US, already subject to tariffs, could be further squeezed after 232 measures.
Steel mills exporting to the US would see their margins squeezed by the imposition of duties, according to Ramsay, but the introduction of a quota would mean mills would try to extract more value on a per-tonne basis for their sales to the US.
South Korea was the third-largest exporter to the US in 2017, after Canada and Brazil. That country shipped 3.40 million tonnes of steel to US shores last year, 1.71 million tonnes of which were line pipe and oil country goods alone.
Pipe manufacturers such as Husteel Co and Nexteel Co will likely be the hardest hit by the proposed trade restrictions, trader and mill sources in the country told Metal Bulletin.
Although Japan is not included on the list of countries that could face a 53% tariff, Japanese HRC exports to the US – which increased by 72.6% to 203,913 in 2017 – are also likely to be curtailed due to the 232 tariffs.
Redirected steel volumes
European countries also were not listed for the higher 53% tariff, but EU steel shipments to the US are expected to drop as a result of any trade defense measures, sources told Metal Bulletin.
Still, Turkey could be hit with the punitive 53% tariff. And if Turkish HRC exports to the US become uncompetitive for buyers, that material could be redirected into European markets, sources said.
“Turkey has already been increasing its coil exports to Europe and is unlikely to be involved in any [EU] trade case,” a southern European trader said. “So if Turkey has to redirect volumes from the US to Europe, it might be a problem.” The EU and Turkey have been linked by a customs union agreement since December 1995.
The Section 232 recommendations could cause a “massive deflection of previously US-bound steel products to the European Union’s open market,” which could seriously and unfairly injure EU producers, European steel association Eurofer said.
Larger volumes of Turkish HRC could enter European markets, particularly in the case of Turkey being hit with a ‘targeted’ 53% tariff, some European market participants fear.
Alternatively, European exporters might be able to sell larger quantities of long steel into the US should the country enforce steeper, targeted duties on competing exporters like Turkey, sources in southern Europe said.
Although the United States does not constitute a key export market for India, prices for Indian exports of steel could be indirectly depressed by tariffs or quotas, sources said.
US import tariffs could cause a “chain reaction,” with a cut in Chinese HRC prices leading Japan and South Korea to decrease their prices in order to remain competitive in Southeast Asian export markets, according to one scrap seller. This would also put pressure on Indian prices for the material, he noted.
Wire rod from Russia, Belarus and Ukraine - which is already subject to US anti-dumping duties - has been redirected to Europe, Israel and Africa since the duties were applied, sources in the CIS region said.
But even in the event of a quota restricting foreign steel to 63% of total 2017 shipments, global steel prices are unlikely to fall, Ramsay said.
Around 13 million tonnes of foreign steel would be kicked out of the US market under such a quota, representing just 1% of overall non-US demand, according to Metal Bulletin Research. Therefore, in a market forecast to rise by more than 1% this year, prices for this redirected tonnage are unlikely to be decreased to meet demand outside of the US, Ramsay said.
Indeed, the only way steel prices outside of the US will fall is if global steel demand rises by less than the volume of the diverted tonnage - which is unlikely to happen, he added.
High costs, possible shortage for US end users
US mills are expected to see a rise in their domestic steel prices, but having to pay the extra cost of tariffs or abide by quotas on their imports could cause shortages of material in US markets, sources in the country fear.
One product that is central to the operations of several US mills is semi-finished steel, 7.53 million tonnes of which was imported in 2017, according to US Commerce Department data. Brazil was the largest supplier of semi-finished steel products to the US in 2017, sending 3.78 million tonnes – most of which consisted of slab that was re-rolled by US mills.
Brazil market sources said that any tariffs on slab would be counterproductive for US mills, which would struggle to get supplies of the material through any other means.
“Without imports, there won’t be enough slabs in the [US] domestic market,” according to Marco Polo de Mello Lopes, executive president of Brazilian steel institute Aço Brasil. “We are very optimistic that [Brazil] will not be included in this measure.”
Trump will likely avoid subjecting semi-finished material to trade restrictions and instead take a more precise approach - perhaps aimed at oil country tubular goods (OCTG) and bar products - that would meet the needs of both mills and end users, according to Keybanc Capital Markets analyst Philip Gibbs.
The average premium of US HRC over European HRC on a per-tonne fob-mill basis was around $100 per tonne over the last five years, Ramsay said. He predicts that mills will be able to pay a maximum extra premium of $80 per tonne on their HRC; after that point, the mills likely will refuse to pay more, once prices become uncompetitive with their European counterparts.
At the point of a $180-per-tonne premium, US users would then withdraw from the market, creating a fall in demand and collapsing the premium, he added.
In the case of a blanket quota being applied, prices for both seamless and welded OCTG products in the US would likely rise by 20-30% over 2017 prices on an annual basis, due to supply shortage, according to Kimberly Leppold, senior analyst at Metal Bulletin Research.
With tubing and casing costs accounting for about 11% of on-shore US drilling costs, a 20-30% rise in costs of OCTG, leaving all other costs unchanged, would mean the share of OCTG costs would rise by nearly 14%, possibly leading to a 5% drop in drilling activity, Leppold said.
Existing trade restrictions on line pipe already increased the American Petroleum Institute’s (API’s) steel costs by 25%, the API said, with the implementation of the Section 232 recommendation expected to both further raise costs and reduce the number of new pipelines.
Lessons from Section 201
The lack of clarity about what action Trump will take means that it is difficult to predict what will happen to prices outside of the US. But market participants can look to the impact of the Section 201 remedies applied by ormer President George W. Bush in March 2002 to forecast one possible outcome.
Section 201 trade measures led to US HRC prices jumping by 62.5% within three months in 2002 - from $240 per ton in the first week of March to $390 per ton by mid-June, according to American Metal Market’s pricing records. Prices elsewhere also gained in the same period. Metal Bulletin’s price assessment for export HRC from the CIS region climbed by $60 per tonne to $220-250 per tonne fob compared with $160-190 per tonne fob.
But even after Trump makes his decision, the trading environment between US steel importers and their foreign suppliers could be further muddled due to possible challenges or retaliations from other countries.
China’s Trade Remedy and Investigation Bureau has said it will take measures to safeguard its rights in the face of the recommendations, while Eurofer has said it believes that the deployment of blanket trade restrictions will almost certainly be contested by World Trade Organization (WTO) countries.
Since the announcement, South Korea launched a complaint with the WTO, to challenge the US Commerce Department’s methods in six anti-dumping and countervailing investigations.
Additional reporting by Paul Lim and Fiona Lam in Singapore; Ellie Wang in Shanghai; Ana Camargo and Felipe Peroni in São Paulo; Viral Shah in London; Maria Tanatar and Vlada Novokreshchenova in Dnepr, Ukraine; Cem Turken in Mugla, Turkey; Michael Cowden in Chicago; and Dom Yanchunas and Nat Rudarakanchana in New York.