Trade Remedies: The Good, the Bad, and the Ugly

All the extra steel production has to go somewhere and with China’s domestic demand down it is flooding the world with exports helped by devaluation of its currency. A good portion of those exports end up in the US. Imports of steel rose from 29.2 million tonnes (32.2 million net tons) in 2013 to 40.2 million tonnes in 2014 (44.3 million net tons). According to the US Department of Commerce steel imports totaled 19.7 million tonnes (21.7 million net tons) in the first half of 2015.

World steel capacity utilization is currently at 85 percent, or 1,950 million tonnes, but reduction through mill closures is a “hard political issue” said Lowrey. The other option is to “grow” into the capacity but that is also problematic. At the current utilization rate, a 1 percent growth rate in demand would take until 2033 to absorb if no new capacity was added. Bring that growth rate up to 2 percent and you cut the time to 2024. A growth rate of 3 percent, which Lowrey says is probably unrealistic, would soak up demand in about 5 years.

Capacity is likely to grow according to Kevin Dempsey, at AISI, who noted that Vietnam and India both have capacity expansion plans, mirroring China’s development of its steel industry, that have the potential to add 38 million tons and 190 million tonnes, respectively, by 2025. In the short term, according to a March 2015 OECD report, world steel capacity in 2017 will increase to 2.36 billion tons.

With so much of the excess tonnage reaching US shores and affecting US production and prices, what can be done about it? The go to solution right now is trade cases, the most recent of which are:

June 3 – Corrosion resistant steel from China, India, Taiwan, South Korea, Italy
July 28—Cold rolled steel from China Brazil, India, Japan, South Korea, Netherlands, Russia, UK
Aug. 11—Hot rolled steel from Australia, Brazil, Japan, South Korea, Netherlands, Turkey, UK

Filing an antidumping and/or countervailing duty suit is the method available to US industries when imports begin taking too much market share from domestic companies and negatively pressure domestic prices through dumping and subsidized pricing (we have another article on this subject in tonight’s issue).

SMU sentiment seemed to be that that so far there the reduction of imports has been marginal on HRC and CRC imports with little to no impact on pricing in the short term. Some pricing support is evident in coated products. The attendee sentiment was backed up by analysts Timna Tanners, of Bank of America Merrill Lynch and John Anton, IHS Global insight who both expect little change to pricing in the very near future despite the filings.

Anton agreed with Lowrey that there is little chance that the steel industry can grow into the capacity, at least not within the next ten years. Regarding dumping cases, he said, they are a five year solution that generally are rubber stamped in the sunset review to result in a ten year penalty.

Anton commented that if sweeping victories are won in trade cases, the steel industry is likely to increase production which would “dampen potential upside for pricing.” “They can have tons or price, but not both,” said Anton, “unless they hold the line and keep production where it is—but they won’t.”

Jerry Richardson of CSN weighed in on trade cases and imports. Brazil made the list of targeted countries in the AD/CVD cases on HRC and CRC and, as general director for CSN LLC, a subsidiary of the Brazilian steel producer CSN, Richardson took issue with the trade case filings.

As the US dollar strengthened over the Brazilian Real exports to the U.S. from Brazil increased but not at dumping levels, said Richardson. “How can it be dumping if our sales price is higher than our domestic price?” he asked. He also noted that US mills brought in 9 million tons of slabs in 2014 and, therefore, are not complaining about the pricing of slabs. “All this protectionism is a subsidy in itself,” said Richardson, “and a government sanctioned one.”

James Banker, Executive VP Commercial at NLMK USA, a subsidiary of Russian parent NLMK (on the CRC trade case list), also mentioned the import of slabs but in reference to a trader’s Letter to the Editor in Steel Market Update who sarcastically suggested that if Brazilian CRC was considered subsidized why not slabs (semi-finished steel). Banker commented that that why would a mill want to build a melt mill to make slabs when they are readily available to buy. “There is no domestic market for slabs,” he said, “They are just raw material.”

Alan Beaulieu, Principal at Institute for Trends Research (ITR), called himself a “free trade and fair trade guy” who is against protectionism. He warned that the US needs to be an economic global player or when the next recession that hits the US, things will be much worse.

Former Nucor CEO Dan DiMicco said free trade is not great for the US and “free trade in the world is all managed.” “From 1990 to now it was the free trade era and created a global ‘kum-by-ya’ economy” in which “nobody played the rules and we allowed the rules to be distorted and abused.” He added that there is not one free trade agreement where there is a net trade balance, they are all trade deficits.

During the World Pricing presentation, Gaurav Chhibbar, Raw Materials Manger at Cargill Metals, was asked why imports are not decreasing in face of all the trade cases. One of the reasons, said Chhibbar, is that importers are taking the risk and placing orders, so countries with cases against them are continuing to sending products out. Also, he said, foreign mills think they will be able to successfully defend against the cases.

John Moseley, Senior Director Trade Development at the Port of Houston Authority, told conference attendees that the trade environment “impacts us in a big way.” In 2014, of the 12 million tons of steel passing through the port, 10.5 million tons were imports. Without taking sides, he noted that trade legislation, AD/CVD cases and currency devaluation can impact the port favorably or negatively and creates or cuts jobs as the cycle of shipments ebbs and flows.

The last presentation of the SMU 2015 Steel Summit Conference was the Trade Panel. Supporting steel mill initiatives was Kevin Dempsey, Senior VP, Public Policy and General Counsel, AISI. Richard Chriss, Executive Director and International Trade Counsel, AIIS, provided counter arguments along with Lewis Leibowitz, trade attorney, Law Office of Lewis E. Leibowitz.

According to Dempsey almost all of the growth in the steel industry has been taken over by imports. US capacity utilization dropped from 77.5 percent in 2014 into the 60s and is now around 72 percent. The big decrease hurt profitability and caused facility idling, due in large part to the massive surge of steel imports to the US market and a resulting inventory hangover.

Steel imports were up 36 percent in 2014 and rose 15 percent in the first half of 2015 year over year. Although the majority of import activity was from China, imports increased across the board by country and product.

Overcapacity in China continues to be a problem with the Chinese steel industry eight times the size of the US industry. Although the capacity in the US remains relatively flat in good or bad times, said Dempsey, in China five year plans and steel adjustment plans that increase capacity are “designed to control and direct the nature of the Chinese steel industry.”

Trade cases are necessary tools for the US steel industry to address dumping and subsidizing but further work needs to be done to improve trade remedies and address circumvention and evasion of AD/CVD orders. Dempsey related a story about an email from a trading company that explained a process to evade duties by fraudulently changing country of origin. New rules for the International Trade Commission would be transparent to ensure that such activity would be sought out and punished.

Another issue to be addressed is currency manipulation and state-owned enterprises. There needs to be international rules for how state-companies must act on an international basis. A problem that may occur, however, said Dempsey, is that most steel mills in China are provincially owned.

Richard Chriss began his presentation by referring to remarks made by former WTO Director-General Pascal Lamy:

Protectionism does not protect. It does not strengthen economies and it does not save jobs. Governments protect people by supporting domestic economic growth and social protection, not by resorting to short-term policies that may benefit the few at the expense of the many.

Chriss remarked that the US steel industry is one of the most protected sectors of the economy. Global economies are closely linked, he said, and we have been trying to reduce tariffs and barriers to trade. “Trade has gotten a bad name,” said Chriss. “It is not a zero sum game—I win, you lose.”

“Currency manipulation is an important issue to take to the table with China and others,” said Chriss, “but let’s not forget what we have been doing: quantitative easing, pumping more money into the economy to strengthen the dollar. Do we really want to go down that road?”

He pointed out that steel imports closely track with GDP growth showing it is associated with economic health and that steel is a critical element in our economy. Steel imports are important to consumers because the U.S. is consumer led and competition on price matters.

Imports also contribute to job employment which is evident by the 1000 longshoreman working per day at just the Port of Houston which is multiplied by all of the other workers who are part of the supply chain, said Chriss. Trade laws and cases are meant to serve corporations but do not take into account the domino effect when imports drop off and jobs are lost.

Lewis Leibowitz noted that the rising steel prices that the steel industry hopes the trade cases will stimulate are “good news if you are producer but not so great if you are a consumer of steel.”

“Free trade has gotten a bad name?” said Leibowitz. “I would amend that statement to free trade doesn’t work perfectly but also assert free trade works a lot better than protectionism.” Trade cases, he said, are on the protectionist side.

Leibowitz enumerated what trade remedies do for the U.S. economy: force steel prices up by limiting supply, price imported products out of the U.S. market, and damage downstream U.S. manufacturers by leading to offshoring and job loss.

There are 60 manufacturing workers for every steelworker at a mill, said Leibowitz. If you want to revitalize manufacturing “you look at steel users, not the mills.”

For U.S. importers, trade remedies can force them out of business, retrospective duties can fatally damage U.S. importers, and reduce or eliminate imports. They can cause foreign producers and exporters to seek other markets.

In effect, said Leibowitz, trade remedies are equivalent to high tariffs which will not bring US manufacturing back in the 21st century.

Leibowitz said any dumping margin of 100 percent should be looked at as suspect because it is essentially an embargo fee such as those used in sanctions to punish countries.

His suggestions for how to improve trade remedies are to shorten the duration of relief, use a prospective duty assessment, balance the benefits to domestic producers to harm to downstream users and consumers, fairer calculation of margins, and allow manufacturers to participate in trade remedy investigations and reviews.

So to wind things up, the best that can be said is that trade remedies can be good, bad or ugly, with losses for every win.