US, imported rebar spread narrowest since 2012

The spread between domestic and imported rebar is at its narrowest point since 2012 due to the Section 232 tariffs on steel imports into the United States, which have made imports less attractive to US market participants and ignited demand for domestic material.

According to American Metal Market’s calculations, the current pricing spread between domestic and imported rebar for the month of September is $1.10, with an average mid-price for domestic rebar of $35.50 per cwt fob Midwest mill ($710 per short ton), and an average mid-price for imported rebar of $688 per short ton cfr Port of Houston ($34.40 per cwt).

For 2018, the average mid-price for domestic rebar through September is $34.22 per cwt fob Midwest mill ($684.40 per short ton), while the average mid-price of imported rebar is $645.20 per short ton cfr Port of Houston ($32.26 per cwt), inclusive of tariffs and existing countervailing and anti-dumping duties where applicable.

Altogether, 2018’s spread between domestic and imported rebar of $1.96 is the narrowest it has been since a spread of $1.69 in 2012, and down from a 10-year high of $8.40 in 2015 when the global steel industry was experiencing a sharp downturn.

The cause
According to market participants, the primary catalyst behind 2018’s spread between domestic and imported rebar is the Section 232 tariffs, originally announced by President Trump on March 1 of this year.

“232 has the predominant effect on it,” said one distributor, explaining that the tariffs have made market participants wary of buying imported material, driving the price of domestically produced rebar up while limiting the amount of imported material coming into the United States.

This assessment was shared by other sources.

“It’s 100% Section 232 related,” agreed a trader, noting the high cost of domestic rebar compared to global prices.

For global reference points, the export price of Turkish rebar is $23.25 per cwt ($465 per short ton) according to Metal Bulletin’s latest assessment on September 20, while the price of rebar exports from Southern Europe on September 26 was $25.63 per cwt ($513 per short ton). Meanwhile, the price of Chinese rebar exports came in at $25.80 per cwt ($516 per short ton) on September 26.

“[The] Section 232 tariffs have made an unrealistic spread where domestics have been able to raise their prices,” added a buyer.

A second trader agreed. “Now with the 25% addition the price of rebar is unbelievable in the US,” he said. “There’s nowhere in the world like this.”

This trader argued that domestic mills have no reason to increase prices for the time being, which would incentivize rebar consumers farther down the supply chain to source from overseas producers.

Inventories go domestic
With the tariffs largely pricing imported material out of consideration for market participants, sources told American Metal Market that they or their customers are now heavily weighting their inventories towards domestically produced rebar.

While the first trader’s inventory still primarily consists of imported material, his customers are moving from inventory of 80% imports and 20% domestic material to trying to achieve a 50/50 balance.

The distributor said he saw a similar dynamic play out with clients, noting that they have shifted from about 60% domestic and 40% imported rebar to 85% domestic and 15% imported as a result of the narrowed spread.

The rebar buyer saw it differently, contending that while there are sporadic opportunities to replenish his inventory with domestic rebar, it is, for the most part, not readily available.

“There is some saturation of supply that evolved due to summertime slowness of demand and the surge of imports hitting the market, but if you go back six months ago, one couldn’t even get their historical consumption of domestic steel,” he maintained.

Given the pricing dynamic between domestic and imported rebar, this buyer maintained that access to US-produced rebar is essential for those in the market.

“Domestic (rebar) is the most strategic source right now,” he said, adding that his inventory of imported rebar is selling much more slowly than normal as a result.

Win for US producers
Sources were unanimous in their assessment that the current pricing spread between domestic and imported rebar is driving market participants into the arms of domestic producers.

“US domestic mills benefit the most,” argued the buyer. “Independent rebar fabricators have been hurt the most since they have contractual work at fixed prices where they can’t pass through the price increases.”

The first trader offered a nearly identical assessment, adding that along with US mills, mill-owned fabricators are poised to reap the benefits of the pricing spread, while independent fabricators, rebar distributors, traders and construction companies stand to take the biggest hit. Indeed, domestic heavyweights Nucor and SDI recently posted record Q2 earnings, partly crediting the Section 232 tariffs and widening metal spreads for their success.

The rebar distributor explained that domestic mills and mill-owned fabricators are “able to protect downstream operations more than anyone else.”

However, the distributor looked at the situation as more of an opportunity, as this source’s company can supply the needs of customers regardless of whether the tariffs are in place or not since their operations straddle both the domestic and import rebar market.

Can it last?
With the bulk of 2018 in the rearview mirror, the question for those in the rebar market is whether the spread can last, and if so, for how long. Since sources attributed the genesis of the pricing spread between domestic and imported rebar to the Section 232 tariffs, they naturally tied the spread’s durability to the lifespan of the Trump administration’s signature trade policy.

“It all depends on what Trump does with the Section 232 tariffs,” the rebar buyer said, adding that from his point of view, the spread’s longevity hinges on the outcome of trade talks with the European Union.

“The vulnerability is what happens with the EU – will the 25% remain, or will there be a quota-based model ultimately worked out,” this source explained. “If the 25% [tariff] is removed, we will see downward pressure of US pricing.”

Regarding Europe specifically, the US and EU issued a joint statement on July 25 pledging to “resolve the steel and aluminium tariff issues and retaliatory tariffs” following European Commission president Jean-Claude Juncker’s visit to the White House, signaling that both parties are holding back from further escalating trade tensions between the transatlantic allies.

“As long as Section 232 is there, the spread will be like this,” the first trader commented before including the caveat that the removal of the tariffs, or an infrastructure bill could change the equation. This trader argued that since some federal projects mandate the use of domestically produced material, an infrastructure bill would create additional demand for rebar which domestic mills cannot handle, creating an opening for imported material to reenter the market.

American Metal Market noted in its most recent market report that declining raw material costs and the limited availability of imported material, particularly after the doubling of the Section 232 tariffs on Turkish steel exports to the US, may trigger a late-2018 pricing correction for rebar.

From the perspective of the rebar distributor, the prevailing domestic versus import pricing spread is not sustainable, asserting that either domestic prices will rise or prices for imported rebar will drop.

“One or the other,” this source concluded. “We’ll see who blinks first.”