SMU Data and Models

SMU Market Trends: Borders Open for Business

May 23, 2019

Now that the U.S. borders are open to tariff-free steel from Canada and Mexico, and lower-tariff steel from Turkey, can the market expect a flood of imports in the coming weeks and months? And what will that mean for steel prices?

Last week, the Trump administration removed the 25 percent tariff on steel imports from Canada and Mexico., lifting a major barrier to passage of the new U.S.-Mexico-Canada Trade Agreement. The tariff on Turkish steel was cut in half, from 50 to 25 percent. Despite the Section 232 tariffs, which have been in place for more than a year, hot rolled steel prices have been on a steady decline and are now more than 30 percent below their 2018 peak. At this point, sentiment appears divided between those who feel the market has already factored in the removal of the tariffs and those who expect revived imports from Canada and Mexico to oversupply the market and add further downward pressure to prices.

Three out of four respondents to Steel Market Update’s market trends questionnaire this week said they would now consider sourcing steel from Mexico, Canada or Turkey. “We will test the market. It’s all about price,” said one buyer. “We have always bought steel from Canada and will opportunistically buy from anyone who gives us a price our customer is happy with,” added another. Some don’t see Turkey as much of a factor with its 25 percent disadvantage. “Turkey will struggle getting an order for HRC unless they opt to sacrifice some margin relative to what they can get in other markets in the world,” noted another exec.

More than 70 percent of SMU’s respondents expect prices to move lower now that the domestic mills will face more import competition. Nearly all the rest expect prices to remain about the same. Very few see prices rebounding. Following are a some of their insightful comments:

“There will be pressure to move lower as more tons are introduced into the market.”

“More supply means greater pricing flexibility.”

“Prices will go lower in the U.S. and increase in Canada.”

“There will be no immediate impact, but over time, if demand doesn’t pick up, then prices will continue to fall as there are more supply options.”

“It depends on how low the domestics are willing to go on their pricing.”

“There will be tremendous amounts of secondary steel flowing into the U.S. now.”

“It’s tough to call. Adding two more supply sources will dilute the domestics’ grip on the market, although I don’t see either Mexico or Canada [discounting heavily] to grab market share.”

“In the very short term there may be a slight softening, but from this point there is much more upside potential than downside.”

“Turkey is a wild card. The lower tariff on Turkey may very well give them opportunities to ship into our domestic market. This in turn could lead to higher scrap demand in Turkey shipped from the U.S., which would tighten the scrap market leading to a floor or possible uptick in scrap prices. That would give the steel market at least one thing to point to for stopping the price slide.”

“I do believe it will take a little bit of time for historical pre-tariff supply chains to return to what used to be ‘normal.’ It will, in my view, have an upside on HRC prices. The USA did export a lot of HRC to Mexico, for example. Sadly, it won’t be an overnight dynamic. Coated products may see a further erosion of the share Vietnam and Taiwan have in the USA market.”

“I just don’t see it going a lot lower unless China starts dumping through Canada and Mexico.”