TRUMP SPECIAL: Trade policies could send steel prices, inflation soaring, experts say
The steel industry in the USA will have the ear of president-elect Donald Trump as his incoming administration pushes through potentially radical changes to the country’s trade policies, according to industry experts.
And US mills are likely to benefit from aggressive trade policies that could further limit steel imports and, potentially, imports of other steel-containing goods such as passenger vehicles and appliances, they added.
Such policies are likely to boost profits at domestic US mills and spur activity in both hiring and capital expenditures, experts said.
But what is good for mills may not be good for the rest of the economy, some warned, adding that inflation could harm US consumers if the new president’s administration pushes arguably protectionist trade issues too far, too fast.
A steel industry view
“I think you have a zeitgeist in this country right now that says, if we want trade, we want it to be fair and to benefit American workers and American companies,” Philip Bell, president of the Steel Manufacturers Assn (SMA), told Metal Bulletin sister title AMM.
Steel and “fair” trade were key planks, not only of Trump’s campaign, but that of his Democratic Party rival, Hillary Clinton, Bell said.
“It’s cause for optimism. But now you need to turn that political rhetoric into political reality. And it’s [a] wait-and-see [situation] on that,” he said.
To begin with, the domestic steel industry would like to see the Trump administration designate China, and perhaps other countries, as currency manipulators, Bell said. Such a move would allow US trade officials to impose countervailing duties to the extent that a currency is deemed to be devalued, he added.
Favourable energy prices or raw material prices are already considered to be subsidies against which countervailing duties can be assessed, Bell said. And there is no reason why an artificially low currency should not be countervailed in the same way – and no reason why the USA should not start to implement such duties soon, he added.
“There is some belief that this can be done under existing rules and regulations,” Bell said, “and it would be right in line with some of the president-elect’s strong language on currency manipulation.”
The administration could also help the steel industry, and US manufacturing in general, by “self-initiating” trade cases, Bell said. Past administrations have typically left it to private companies or unions to file trade petitions. The problem, he said, is that such a process is expensive and slow.
A private company might take 12-18 months to gather data before filing a trade petition, Bell said. And it may take the government at least that long again to decide whether domestic manufacturers have been injured and whether duties should be imposed, he said.
But the government – whether in the form of the president, the speaker of the House of Representatives or even the Senate majority leader – could initiate a case as soon as it saw market conditions deteriorating and “unfair” trade practices taking place, Bell said.
“[Self-initiation] has not been used a lot, and it has not been used recently, and that’s why we think there it should be given more serious consideration,” he said.
Furthermore, trade petitions under the Trump administration may not be limited to traditional anti-dumping and countervailing duty cases, Bell said. There could be more anti-circumvention petitions filed which resemble the one targeting cold rolled and coated flat-rolled steel from Vietnam, he said.
“Anti-dumping and countervailing duty cases don’t truly reflect the true amount of dumping and subsidisation that’s taking place, so anti-circumvention cases are a nice way to supplement that,” Bell said. Besides, successful petitions have already been filed against many finished steel goods, he said.
In addition, US trade officials already have available the mechanisms to bring trade cases more quickly and aggressively, thanks to the Enforcing Orders & Reducing Circumvention & Evasion (Enforce) Act that was signed into law last year by current President Barack Obama.
The provisions of the act have not yet been implemented as forcefully as steel executives might like, partly because of “bureaucratic inertia” and an occasional lack of cooperation with industry under the outgoing presidential administration, Bell said.
The unsuccessful anti-circumvention petition filed by Wheatland Tube, a subsidiary of Chicago-based Zekelman Industries, highlights such problems, Bell said. But similar roadblocks could “melt away” under the Trump administration, he said.
“Victory comes in stages. You may lose a battle or two before you win the war,” he concluded.
‘Be careful what you wish for’
Steel will be a “favoured child” for the next four years (and potentially the next eight years) under President-elect Trump, according to Philip Gibbs, metals and mining equity research analyst at KeyBanc Capital Markets.
For proof, look no further than Trump’s choices for his presidential cabinet. Investor and steel industry veteran Wilbur Ross has been nominated to become commerce secretary, and trade attorneys have been chosen for other powerful roles in the administration.
Robert Lighthizer, for example, has been nominated to be United States Trade Representative (USTR). He is a partner in the international trade practice at Washington-based law firm Skadden, Arps, Slate, Meagher & Flom & Affiliates, and he has long represented Pittsburgh-based US Steel in trade disputes.
Dan DiMicco, former ceo of Nucor, headed Trump’s “landing team” for USTR. He told AMM on January 11 that he will remain active with transition efforts until the end of the month.
At a minimum, the Trump administration will sustain the strong momentum that the domestic US industry has gathered through a string of successful trade case filings under President Obama, Gibbs said. And as part of his tax reform package, Trump could not only slash taxes for US companies but also impose VAT on imports, he said.
VAT costs would come in addition to any pre-existing duties on imports, Gibbs said. This would not only affect big-box retail stores that rely on imported goods but also, for example, steel consumers bringing in rebar from Turkey, he said.
The result could be that prices will surge for steel products and consumer goods such as appliances, passenger vehicles, and even small domestic items such as coffee-cup coasters, Gibbs said.
“It makes importing less fruitful and more costly, and that drives inflation because the USA is not set up to manufacture all the things we import,” he added.
The question now is not whether the trade landscape will change under Trump, but whether the market has taken into account – especially in its pricing – just how drastically it could change, Gibbs said.
“There is a lot more to think about right now in terms of the steel industry and the US economy than there has been in quite a while, because the economy has been relatively predictable. But with radical changes, I don’t think you can say that you know how it’s going to turn out,” he said.
There is little doubt that industrial companies, including steelmakers, stand to benefit, Gibbs said. What is less clear is whether what is good for steel is good for US consumers.
“I think [Trump] means well in terms of the American people,” Gibbs said. “At the heart of what they are trying to do is to create jobs. But consumer inflation is a by-product of that.”
It is also important to consider that the policies Trump might implement are not without precedent. The USA has previously implemented steep tariffs when the dollar was strong and oil prices were weak, notably in the 1980s and the early 2000s, Gibbs said.
“The unknown [factor] is how far this administration will take it,” Gibbs warned. “Because for every action, there is a reaction. And I don’t know that anyone has contemplated what the global reaction to this might be, or that it might force [the Trump administration] to take more of a middle ground as time passes.”
A trader’s view
The US economy consumes about 120 million tons of finished steel annually, of which about 20-30% is imported, John Foster, chairman of the American Iron & Steel Institute (AISI), told AMM.
That ratio does not change dramatically whether times are good or bad, nor does the fact that about 20% of those imports are accounted for by domestic mills importing semi-finished goods such as blooms, billets and slabs, Foster said.
The incoming administration is probably aware of the importance of imports, even to the US steel industry, given that Trump has nominated Ross to be his commerce secretary, Foster said.
Foster knows Ross from the former’s time at the former Jones & Laughlin Steel, which became part of Ross’ International Steel Group.
“My view of Ross is that he is a pragmatic, logical and balanced manager with a deep insight into the strengths and weaknesses of the US steel industry,” Foster said. “At the same time, he is a global man with global interests and a global understanding, which makes me believe that he will support a balanced and reasonably unbiased approach to the free and responsible trade in steel.”
Ross’s nomination is a “hopeful sign” that Trump appreciates the complexity of the global economy, Foster said. And Trump, a businessman himself, probably understands the old maxim that a rising tide lifts all boats, he added.
What is holding back the US steel industry is not imports but a gross domestic product (GDP) that has risen by a meagre 1.40% per year since 2009, Foster said.
Calls for an aggressive application of US trade laws are a “siren song” that will not boost growth and could prove perilous to domestic mills and to the consumer demand that drives the vast majority of the USA’s GDP, he added.
“History has shown [aggressive trade measures] to be generally short-term fixes that ultimately hurt many in our shared customer base,” he said, “and [that they] were not a cure for the fundamental general economic weakness of the time; nor, with all due respect, [were they a cure for] certain inherent inefficiencies within parts of the domestic industry.”