SMU Q&A: Share Your Views on the Tariffs

A: Service Center Executive: First of all, I think it’s too early to tell, so I’d give it an “incomplete” at this point. The tariff has strengthened the domestic steel industry’s financial standing, at least short-term, and has enabled them, particularly on the flat rolled side of the business, to announce new capacity or bring back significant idled assets, which from an investing in our “economic security” point of view could be considered a win.

Will the long-term effects of these higher selling values eventually hinder future investment as manufacturing seeks lower-cost solutions? That would seem to be an issue, but again, only time will tell.  

Another possibility would be that with the new low-cost capacity and improvements, the industry will be situated to efficiently defend itself against “fairly traded” imports when the quotas and tariffs are gone, and improve our ability to compete on the world stage, thus improving our national security.

The overall issue is, will these tools really be able to influence some of our larger trading partners to revise or change their trading practices? To lower barriers for our exports? To stop subsidized surges of product? And to stop the use of illegal business practices and reduce the trade deficit by competing fairly, which is the ultimate goal? Judging by this early metric—and it’s early in a very long-term game—we’re losing.

I don’t think the administration has done an effective job of really appealing to the American people for support of this long-term goal and has instead focused on short-term name calling and scare tactics, which are distasteful and have left a significant number of Americans missing the point. This could ultimately seal the fate of the administration’s drive to failure due to a lack of that support.

A: Mill Executive: I realize that this does not fall in line with conventional wisdom, but…. Did Brazilian slab prices fall when they agreed to lift the duties? No. Pricing went up. Why did it go up? Because demand existed and the quota volume was less than the market demand. Have they gone down in the meantime? Yes. Just like all global steel markets have. Oh, by the way, there is still a very handy premium for mills selling Brazilian slabs to the U.S.

Duties coming off does not mean that the people selling the product want to make the same or less money, and there are many factors that come into play when pricing the product. I can also point to the performance of Korean product pricing immediately after their deal was cut, as well as the pipe and small initial parcels of Argentine product that were shipped.  

If a Mexican seller has been selling longs or flats at price X for seven months, and you have to assume that customers are placing orders at prices that are competitive (otherwise they would not even place those orders), why would the seller sell at X minus duty the very next day? If the market price is X, then only a fool would offer steel at X minus. After all, this is a for-profit business.

The skeptics will say that it is human nature to sell cheaper and choose the path of least resistance. True enough. Also, they will say that customers “know” that there is no duty and will insist on a cheaper price. So, apparently this theory is based on the premise that customers have not been pushing suppliers hard over the last seven months. Customers are taking it easy on their Mexican suppliers? Really? “Hey, I feel sorry that you have to pay a duty to bring material to the U.S. and I commiserate with you, so instead of insisting that you be competitive versus domestic, or Vietnam, I will pay you a premium… after all, you are more than just a supplier, you are a nice guy and I stand together with you in the face of these duties!” I’m not sure that conversation occurs very often. Nor should it. Customers have to serve their own interests and must source competitive steel and navigate the process as best as they can. My point is that they have been buying at market prices and will continue to buy at market prices.

Getting back to the skeptics, I hear them saying “exactly, they will buy at market prices and those are likely to go down. If you are a supplier that does not have a duty, then you will contribute more readily to the prices going down.” Prices have managed to go down just fine and dandy all on their own even with duties in place.  Macro drivers are still boss in our cyclical industry. But you know what drives down prices? Lack of demand and increase in supply. The former is being debated, but the latter is pretty much a given. So, for Mexico and Canada, the question hinges a lot more on supply than on the actual duty level. Get rid of the duty and mills will try to make more money and will follow the market price. Implement a quota and you limit supply. Limiting supply is not something that supports price decreases.

Why have there been few Section 232 deals made? That is very simple: terms have been supply restrictive and mills/countries do not like hard cap quotas whereby shipments actually have to go down. Do you really think the ever-expanding steel industry in Vietnam would agree to shipping say 70 percent of 2015-2017 average volume? They are shipping whatever volume they want, eating the 25 percent, and moving onto the next order.  Do European mills want a firm restriction? The position of Mexico and Canada seems to be pretty clear on this point, as well.

Bottom line is that if duties are replaced by restrictive quotas, the opposite will happen. Mills that are capable of establishing a strategy with their best partners will do so. They will support business that maximizes that strategy. But blasting tons out the door is counterproductive. A lot has been learned by foreign negotiating teams simply by observing the free-for-all of the Brazilian deal – something that is unlikely to be replicated – and the initial chaos of the Korean deal. The U.S. government is not very interested in removing duties without replacing them with a more supply-restrictive agreement.

My conclusion is that prices will go down as long as global goes down. If duties are removed, there will be a more restrictive quota agreement, which is probably going to result in fewer shipments than 2018, which will force the sellers to focus harder on strategic agreements. As global pricing appears to be near a bottom, it could be an interesting market in late Q1 as destocking gets overdone and supply gets tweaked again.