US downstream steel sector hurt by Section 232 duties

After more than a year of facing tariffs on steel imports under Section 232, downstream manufacturers in the United States have begun idling capacity and laying off workers while they tackle higher production costs and reduced market share.

While the 232 tariffs and quotas were intended to address imbalances in the global steel trade –- a key topic in US President Donald Trump’s campaign – the unilateral approach of those measures fails to adequately take into account the interdependence of the supply chain, according to sources.

This oversight has hurt the downstream sector in the steel industry, market participants said, and retaliations from US allies and trading partners have hurt other industries.

Even though many domestic steel prices have corrected downward after spiking last year, downstream manufacturers – companies that use steel mill products, such as wire rod, to make steel-intensive products, such as prestressed concrete (PC) steel strand – still cannot absorb the higher production costs stemming from increased prices for steel products in the US.

An increasing inflow of cheap downstream steel products from other countries, which are not covered by the 232 duties, also has taken away market share and competitiveness from these downstream companies.

Facing these challenges, several members of the American Wire Producers Association (AWPA), along with representatives of several steel mills including Nucor Corp, met with Secretary of Commerce Wilbur Ross, US Trade Representative Robert Lighthizer and Vice President Mike Pence’s office, John T. Johnson Jr., owner and president of Mid South Wire, told Fastmarkets.

Johnson is the current president of the AWPA, and Mid South Wire is a member.

In the meeting, the association members voiced concerns over the viability of the downstream sector and urged the Trump administration to consider expanding the Section 232 remedy to downstream products. Extending the duties would strengthen the entire supply chain, which was the purpose of the tariffs – 25% in the case of steel – Johnson added.

“The bottom line is that 232 tariffs have provided a cost advantage to foreign producers that is insurmountable. The downstream industry hangs in the balance and could conceivably cease to exist in its present form unless the tariff is eliminated or extended to downstream products,” H.O. Woltz III, chairman, president and chief executive officer of Insteel Industries, told Fastmarkets.

Insteel is also a member of AWPA.

However, legal experts and market participants have argued that tariffs may not be a solution for the downstream sector. Tariffs generally do not improve the fortunes of mature industries but are much more successful at nurturing developing industries, according to sources.

“Tariffs are not efficient. A real solution would be getting non-market economies to act like market economies. Don’t give them free status. US companies have [the Environmental Protection Agency] and other things to account for. We need an equal playing field,” Ian Walsh, CEO of Wire-Bond, told Fastmarkets.

In total, American taxpayers have paid more than $27 billion in extra import tariffs from the beginning of 2018 through June of this year, according to an analysis of US Census Bureau data by Tariffs Hurt the Heartland. Nearly 75% of those tariffs are due to the Section 301 tariff actions against China, and tariff totals jumped in June even after the 232 steel and aluminium tariffs on Canada and Mexico were removed in May.

232 unintended consequence: higher costs

While the steel industry in general welcomed the 232 tariffs and quotas, downstream manufacturers and fabricators have faced higher raw material costs due to sharp increases in domestic steel product prices. And for manufacturers considering offshore materials to supply their operations, the additional 25% charge on imports makes those products cost-prohibitive as well.

In January-June, raw materials accounted for 74% of Insteel’s cost of sales, up from 70% in 2018, pointing to a deterioration of profit margins, the company said.

“If the steel industry is the tree, we are the roots to that tree… When the roots get damaged or die, the tree dies or certainly feels the effect,” Johnson said, adding that this situation undermines the whole purpose of the 232 and is a classic example of unintended consequences. 

Prices of steel products in the US rose sharply before and after the 232 tariffs were implemented against most countries in March 2018 and against Canada, Mexico and the European Union in June 2018.

The price of hot-rolled coil, a key pricing indicator for finished steel products, surged to a roughly 10-year high in July of last year. And other products followed suit. Fastmarkets’ assessment for steel wire rod (low carbon) industrial quality, fob mill US, soared to a monthly average of $805 per short ton in June 2018 and was able to maintain at that level for the rest of last year.

Import penetration amid a global slowdown

After the price surge in 2018, this year downstream manufacturers and fabricators have been caught in the middle of a global decline in steel prices, with massive price gaps between goods from the US and other regions particularly pronounced in steel long products.

On an annual average basis, the price spread between US wire rod and northern European wire rod ranged from $71-127 per short ton from 2013-17, Fastmarkets’ pricing records show. That number jumped to $173 per ton last year, when Section 232 tariffs and quotas on imported steel were imposed. In the first half of this year, the price spread widened to an average of $220 per ton.

Similarly, the price spread, on an annual average basis, between US wire rod and Chinese wire rod ranged from $158-210 per ton from 2013-17. That spread stood at an average $196 per ton in 2018 and widened to $245 per ton in January-June this year.

Wire rod prices have fallen worldwide since the beginning of this year. But “the delta between US pricing and world market pricing still puts companies such as Insteel at a distinct disadvantage and allows importers to have their way with our markets,” Woltz said during an earnings call with analysts on July 18.

Insteel saw its shipment volumes decline by 13.9% year on year in the January-March period, its second fiscal quarter. In April-June, the company’s sales volumes managed to rebound somewhat but were still down 3.9% year on year.

“Imports of standard welded wire reinforcement had been a non-factor in the market until Section 232,” Woltz said.

Insteel’s shipments of PC strand and standard welded wire reinforcement, which face rising import competition, fell by 20.4% year on year in the April-June quarter, Michael Gazmarian, Insteel’s vice president, chief financial officer and treasurer, said during the earnings call.

The 232 tariff has created a competitive environment where even Turkey has shifted production to focus on downstream goods, such as low-value commodity standard welded wire reinforcement, which are then exported to take advantage of relatively higher pricing environment in the US, according to market participants.

“They have lost [market] share in their markets” even when demand from the construction sector, a key end-use market for steel long products, was solid and stable, KeyBanc Capital Markets analyst Philip Gibbs said.

According to Dodge Data & Analytics, total construction starts on an unadjusted basis were $378.8 billion in January-June, down 8% from the same period a year ago.

Mid South Wire, one of the largest wire drawers and fabricators in the country, witnessed a similar situation.

Johnson said his company has seen a double-digit year-on year reduction in sales in terms of pounds sold in 2019, and the company instituted a round of layoffs to reflect that downturn.

“Our [capital expenditure] spending is done for the time being, until we get a more stable environment so that we can make better decisions,” he said.

If the 232 continues indefinitely and the downstream sector is not included in the tariffs, part of the downstream sector could disappear, market participants warned.

“It certainly is a real threat. Because if companies are not making money, they are not going to stay in business. They are getting choked out by downstream wire and steel imports that are able to enter the market by circumventing the tariffs… It’s common sense that tells you that that’s a recipe for a disaster,” Johnson said.

And while the steel industry has traditionally relied on anti-dumping and countervailing duties to tackle trade issues, a trade case does not seem to be a good answer for the downstream sector. Dumping suits tend to be costly, with a price tag of $1-2 million per case, and only apply to a single product, according to trade lawyers.

“The best solution is the expansion of the 232 to include [the downstream sectors] in that tariff,” Johnson argued.

Possible relief

“[The downstream manufacturing sector] will get a relief as domestic prices come down continually,” Gibbs said, adding that he expects wire rod prices in the US to average $610-650 per ton next year.

Fastmarkets’ wire rod price averaged $763 per ton in 2018 and $754 per ton in the first seven months of 2019.

Downstream companies also can apply for necessary imports to be excluded from the 232 duties. After much criticism, the US Department of Commerce in June unveiled a new online portal for those exemption requests.

As of June 17, a total of 62,797 steel tariff exclusion requests have been filed, according to data produced by researchers with the Trade and Immigration Project of the Mercatus Center. Steel manufacturers have filed 22,210 objections to those requests. Commerce’s Bureau of Industry and Security has reached a decision on 70% of the steel exclusion requests: 30,545 (49%) have been approved, 13,261 (21%) have been denied, and 18,991 (30%) remain pending.