It's Just the Bottom of the Third Inning…

The reason for the run-up in steel prices in the United States is due to limitations, or the expected limitations, on supply. We have seen anti-dumping and countervailing duties come into play on hot rolled, cold rolled, galvanized, Galvalume and plate products from a whole host of countries. The AD/CVD decisions were prior to President Trump and the U.S. Department of Commerce making the decision that steel is vital to national security and announcing 25 percent tariffs under Section 232.

There has been much discussion about Section 232, with the market split on whether the president’s decision will be good or bad for the industry. What most steel buyers agree on is the 232 tariffs and the entire “exclusion” process for both countries and products is going to totally disrupt the industry, and we are in the bottom of the third inning of a nine-inning game….

Today, SMU was speaking with a mill executive who told us, “I think that after weeks of the subject [232] being out there, customers are just starting to understand what a hard cap quota means. Most market participants heard ‘quota’ but did not make the connection that this does not mean a TRQ [ tariff rate quota with tonnage flexibilities]. Some people already figured this out the hard way on Korean products – boat on the way [with] no ability to clear customs and actually use the steel.” This executive spoke about a conversation he had with one of his customers, “I talked to a customer who told me that Brazil would be able to ship a lot of coated under their quota… He had not realized that some of the 70 percent volume is assigned to HR, CR and plate, items which have dumping duties, and consequently coated is just 70 percent of the past coated volume [average of the last three years of coated shipments].”

He went on, “…There will be more surprises before it is all done. We are in the bottom of the third inning of a nine-inning game. Lots of game left to be played. It is really dangerous, as a trader, to take orders into September and October. Neither the duty is guaranteed to be 25 percent, and most importantly, entry is not guaranteed either.”

So, the key for customers will be the exclusions by product, but even then there may be issues that can complicate the process.

Let’s say company A files for an exclusion on galvanized .012” 60” X Coil since there are limited sources of supply from the domestic steel mills. This item can be produced by company B out of India, so company A files for an exclusion through the government website. He lists trading company C as his supply source and company B as the mill in India and they wait to see if they get an exclusion.

A month (or two) goes by and finally, with no objections by the domestic steel mills in the United States, their exclusion is granted. By then, we are in June or July and lead times out of mill B in India are into November or December.

There are still issues the steel buyer has to contend with:

• Has India agreed to quotas similar to South Korea (70 percent of the three-year average by product)?

• Has India already used up their quota for galvanized steel (and is there a way to know in June or July how many tons are left, if any, in their 2018 quota)?

• Does the steel mill (company B) have a quota on galvanized set by India?  If so, have they placed all of their tons for 2018?

• Does company A have the ability to get their product from another country? No, not unless they filed for an exclusion from that country, producing mill and trading company.

So, our SMU Price Momentum Indicator is currently at Neutral. However, the market is still in transition and no one really knows what the market will look like come fourth-quarter 2018.

Baseball is a nine-inning game (usually) and it can take forever to play sometimes…and we are still only in the bottom of the third inning….