SSS XXXIII: Section 232 supply squeeze could boost US steel prices, execs say

The steel market in the United States has only just begun to feel the impact of the Section 232 tariffs on prices for the product, according to North American steel industry executives.

That’s because demand, rather than Section 232, has been responsible for much of the gains this year, some said.

The average capacity utilization rate of a US steel mill might be 75% but that number doesn’t reflect stronger demand in some markets, such as flat-rolled where capacity utilization rates average 85-90%, Steel Dynamics Inc (SDI) president and chief executive officer Mark Millett said.

And with demand growing, the number at SDI’s flat-rolled mills is more like 105%. “That has driven the price appreciation that we have seen,” Millett said on Tuesday June 26 during a panel on the North American steel market at the Steel Success Strategies XXXIII conference, co-sponsored by American Metal Market and World Steel Dynamics Inc.

“Commerce Secretary [Wilbur] Ross’ comments here recently that prices have gone up because of speculation or speculators is totally inaccurate. It is underlying demand that is driving that,” he said. “And that’s before we really have seen the full extent of 232.”

In the past six to eight weeks, the market has only seen the erosion of import supplies stemming from Section 232. “We think as the summer progresses, we are going to see a tight marketplace – and that is going to bode well,” Millett said.

Ross has accused unnamed industry participants of wrongly “profiteering” from Section 232 tariffs on imported steel, contending that steel prices should rise no more than the amount of the tariffs - 25% in the case of steel.

American Metal Market’s hot-rolled coil index was at $45.52 per hundredweight ($910.40 per ton) on June 21, unchanged from the previous week but up 54.3% from $29.50 per cwt a year ago - before Section 232 tariffs were put in place. It is also the highest point for steel prices in nearly a decade.

Alan Kestenbaum, executive chairman and CEO of Canadian flat-rolled steelmaker Stelco, agreed with Millett’s assessment. “People don’t realize what’s coming in terms of a lack of supply in the market. They’ll see it soon. But that can scare away customers,” he cautioned.

The result is that steel producers will enjoy good times in “the very short term... longer term, let’s just look at what Harley Davidson did,” Kestenbaum said.

Harley-Davidson has said that it will shift production of motorcycles headed for Europe overseas due to mounting costs resulting from retaliatory tariffs by the European Union against various US goods.

Companies therefore need to be mindful of the full supply chain, Kestenbaum said, noting one Stelco customer who buys Canadian steel and ships it back and forth across the border multiple times for processing - with each crossing subject to tariffs. “These types of situations are out of control, and will need to get addressed.”

Canada has announced that it will retaliate against US Section 232 tariffs on July 1.

A similar situation is playing out south of the US border, according to John Abbott, chief financial officer of Altos Hornos de México.

“It was a surprise to us and it was a surprise to all of our customers when Mexico was not exempted,” he said. The US unexpectedly applied Section 232 tariffs to both its North American Free Trade Agreement partners and the EU on June 1.

The result has been to empower Andrés Manuel López Obrador, a populist leftist candidate, ahead of the Mexican presidential election on July 1. “There is not a good sense of this being over anytime soon,” he cautioned.

It’s important to remember that the US steel industry did not lobby for Section 232 tariffs, Steel Manufacturers Association president Philip Bell noted. “In fact a lot of us had to get brushed on what a 232 was [when it was announced in 2017]. But it’s here - and it looks like it’s going to be here to stay for a while.”

But not everyone thinks the US, Canada and Mexico will be unable to resolve their differences.

Despite Section 232, trade tensions, particularly in regard to Nafta, might not be a long-term feature of the market, AK Steel CEO Roger Newport said. “I believe ultimately a solution will come out of [the Nafta talks].”

Section 232, while controversial, was necessary because traditional trade cases weren’t succeeding in slowing imports, and a deal on Nafta might be reached at the same time that South Korea agreed to a tariff mechanism in response to the threat of Section 232 tariffs, he said.

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