Section 232: Fear is Like Blood in the Water…

On Monday evening, we participated in a steel industry dinner hosted by Bank of America Merrill Lynch metals and mining analyst Timna Tanners. The room was full of steel people and members of the financial community who invest in steel and related stocks.

The vast majority of the steel people in the room said they believe the ultimate decision will impact a large swath of the steel industry. The expectation is for some kind of quota and tariff system. When the quota is reached, then a tariff considered large enough to act as a deterrent would kick in.

The trading companies at the BoA dinner who spoke on the subject said they had differing views on what their company’s position was on pursuing new orders from their foreign import base customers. One advised they had ceased taking orders until the industry knew better how Section 232 would impact their business. However, other traders said they continue to do business as normal. Their customers “still have to buy steel,” even if they are “like deer in the headlights,” they said. At the same time, this trader told the group that the orders in place are subject to pricing variations depending on the Section 232 effect.

One trader told the dinner group that calling his customers “cautious” is too polite. They are “frozen,” he said, while they wait for the impact of 232 to be announced and digested.

The traders at the BoA dinner believe the flow of foreign imports will slow down considerably in the September/October delivery time period and beyond. They told the group to expect a 50 percent reduction in the levels being seen over the past couple of months (3.6 million to 3.8 million tons).

Steel Market Update also met with other traders on the floor of the Marriott Marquis Hotel in Manhattan. Much like the discussion held at the BoA dinner, we heard variations on the theme of not knowing quite what to expect once the Section 232 announcement is made. A number of traders are concerned about the administrative issues that will be associated with the way imports will have to be handled.

We had a detailed conversation with one trader who represented a number of company-owned foreign steel mills. They continue to take orders. “I’m not in the business of guessing,” he said. “People need their steel.” He added, “We’ve been doing business for 50 years. We’ll figure it out.”

This trader had an interesting take on the whole subject of 232 when he called it “Fake News!” He asked rhetorically, “How many trade cases have we lived through? I don’t believe duties will have any long-term impact.”

He told us that the whole subject was an “inconvenience,” but is creating a discussion about what is right and what is wrong when it comes to free and fair trade (a subject we will be addressing at this year’s SMU Steel Summit Conference). He pointed to the 500 percent AD/CVD duties on Chinese steel, after which prices went down, not up. “Prices go up and prices go down…”

We learned this afternoon that the U.S. Department of Commerce sent Earl Comstock in place of Wilbur Ross to discuss the Section 232 situation. We learned that the DOC is looking for a “broader solution” than just military applications for steel. The theme was a need to address the overcapacity of steel production in the world, as well as the perceived problem of circumvention of our AD/CVD system. He did not estimate a date or define what the final DOC recommendations might be.

So it appears the steel industry will just have to wait and see. As one executive said in an email to SMU: “The problem with waiting until it sorts through is that the market will be a mess in the meantime. Maybe that was their intention all along. Uncertainty creates fear and fear is like blood in the water.”