Tariffs and tribulations: recasting US metals industries

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The Trump administration has tried to bolster the US steel and aluminum sectors through hefty tariffs on imports, with mixed results. Michael Fitzgerald, Nick Ruggiero and Joe Innace analyze the highs and lows of the last two years.

”Trade wars are good, and easy to win,” President Donald Trump tweeted in March 2018 after imposing sweeping tariffs on US imports of steel and aluminum.

The application of a little-known trade remedy sent shockwaves across the metal markets and upended well-established supply chains.

More than two years have passed since the Section 232 investigation was carried out by the US Department of Commerce, under provisions in a 1962 trade act, and 21 months since the tariffs were imposed on the grounds of national security.

The 25% tariff on steel imports to the US appears to have had more impact on company balance sheets and investment decisions than the 10% tariff on aluminum imports. Nonetheless, North American metals markets have been rattled.

A steel renaissance?

Steel prices in the US neared 10-year highs during the summer of 2018 on the back of the tariffs. The daily Platts TSI US hot-rolled coil index, a bellwether finished steel price, surged by almost 57% from the fourth quarter of 2017 to a peak of $920 per short ton in early July 2018. The rise in US steel prices, much more than anticipated, kicked off a celebratory atmosphere for many US steelmakers with US Steel CEO David Burritt declaring a “renaissance” for the industry.

The party in 2018 has been followed by a tariff-induced hangover in 2019. Prices went on a nearly year-long skid from July 2018 to July 2019, with 10-year highs replaced by three-year lows. The drop pushed steel prices to levels not seen since the collapse of oil prices in 2015-2016.

The decline of steel prices had two main causes. Price overreacted to the 25% tariffs as uncertainty and the fear of a supply crunch led to a sharp increase in buying activity. The runaway prices only fueled more buying as market participants who waited faced higher domestic prices when they finally placed orders.

The rollout of the tariffs left market players confused about the rules of the game. The application of the tariffs was broader than many expected and between March and June there was an ever changing landscape of which countries were subject to the tariffs. However, as trade policy calmed in the second half of 2018 and the tariffs were established, buyers began reducing long positions as inventory costs started to look inflated. The destocking continued into the first quarter of 2019 with a brief pause before resuming through the summer of 2019.

The second contributing factor to the decline was a pickup in supply from restarted domestic capacity and higher mill run rates. Domestic steelmakers, like US Steel, looked to capitalize on the high steel prices by bringing back previously shuttered capacity. By October 2018, US Steel had restarted two blast furnaces at its Granite City Works in Illinois with a rated raw steelmaking capability of 2.8 million st/year.

India-based JSW moved further into the US market by acquiring an Ohio-based mill in March. The steelmaker restarted its electric-arc furnace in December 2018.

The restarted capacity was coupled with higher mill utilization rates following the tariffs, leading to the highest annual domestic steel production since 2014 at 95.47 million st.

Despite the price slide in the second half of 2018, the year went down in the record books for domestic steelmakers. Nucor and Steel Dynamics Inc. both cashed in on record annual profits with Nucor netting $2.4 billion and Steel Dynamics earning $1.3 billion. Meanwhile, US Steel posted its largest annual profits since the 2008 peak at $1.1 billion.

The surge in US steelmaker profits and nearly 10-year price highs may have disappeared but the impact is set to shape the US steel industry for the next decade. Through last year, domestic mills unleashed a flurry of new projects to expand domestic capacity. The wave of new flat-rolled supply will come online over the next three years, and is estimated at 8.2 million st, without including the restarted capacity at US Steel or JSW.

The capacity increases can be viewed through two lenses. In the glass half-full view, the new mills will be a giant leap forward that helps to modernize the US steel industry, allowing it to compete on the global stage more effectively than ever.

However, in the glass half-empty view, the added capacity will result in a glut of domestic supply and depressed prices. As a consequence, higher-cost mills will have to either shut down or consolidate. This thesis has been trademarked “Steelmageddon” by Bank of America. “I think this is the most transparent train wreck I’ve seen in my career. And it’s coming for us,” Timna Tanners, an analyst at the bank, said in March at S&P Global Platts’ Steel Market North America conference in Chicago. “The path from here to the next five years could be pretty ugly.”

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