Tarrifs shake up steel sector

Addressing a topic related to U.S. President Donald Trump for a bimonthly magazine (or monthly business journal) comes with its own degree of risk. For an administration that has announced policy or personnel change in a 140-character Tweet, there was always the chance that his proposed tariffs on steel and aluminum imports could be reversed before the article made it into print.

Whatever transpires while the ink on this issue dries, Trump’s rallying cry of “America First,” a key theme of his 2016 election campaign, has already been translated into a more protectionist trade policy.

With the president asserting “trade wars are good, and easy to win,” the U.S. announced plans to impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum, with exemptions granted (and since rescinded) for Canada and Mexico.

Cue frenzied lobbying by the world’s steel powers, while politicians parried verbal blows, raising fears of an escalating tit-for-tat trade spat. Turkey, for example, the sixth-largest steel exporter into the U.S., threatened to slap tariffs on U.S. cotton imports for its large textile industry, while European Commission President Jean-Claude Juncker warned of retaliation against iconic U.S. goods, including Harley-Davidson motorbikes, Levi Strauss jeans and bourbon whiskey.

As the U.S. trade representative went on to unveil tariffs on $50 billion of Chinese imports in the aerospace, information and communication technology, robotics and machinery sectors to combat what it calls unfair acts related to technology transfer and intellectual property, there came a further ramp in rhetoric and retaliation. By early April, China had announced retaliatory duties of up to 25 percent on 128 kinds of products of U.S. origin, including pork, fruit, nuts and wine.

China had also filed an official complaint with the World Trade Organization, or WTO. It’s not alone – more than 40 nations took to the floor of the WTO’s most recent Council on Trade in Goods to protest the unilateral action by the U.S. WTO Director-General Roberto Azevêdo called for “restraint and urgent dialogue” from member nations, warning that “an escalation in confrontation will have no winners.”

Not as bad as it seems

Compared with the size of the global steel industry, the volumes hit by the tariffs are small. The U.S. imported 36 million tonnes of steel in 2017, with Canada, Brazil and South Korea the leading suppliers. But this is just 8 percent of the global steel market’s traded volumes of 473 million tonnes.

China, which produces half of the world’s steel and is the main target of Trump’s ire, has shrugged off the tariffs. China’s powerful Iron and Steel Association said the tariffs would have little impact as the country, already targeted by 29 U.S. duties, only exports 0.1 percent of its direct output to the U.S.

Indeed, the steel industry is no stranger when it comes to protectionism. Analysts at S&P Global Platts, for example, have tracked 170 anti-dumping and countervailing cases globally. And while Trump’s political style attracts headlines, the Section 232 measures he announced are in fact a continuation of U.S. policy.

“Over the last two to three years, the U.S. has been on a crusade of steel protectionism,” explains Peter Brennan, senior editor on the European steel team at S&P Global Platts. “There have been a whole raft of anti-dumping measures and tariff rises in recent years – under the Obama administration, for example, the U.S. hiked its tariffs on imports of cold rolled steel from China to 522 percent, which makes Trump’s proposed 25 percent tariff look very modest.”

Poor timing

What is different is that Trump’s tariffs will hit at a time when global steel prices are finally rising. China has driven up prices since 2016, with demand for steel much stronger than anticipated as a result of its ambitious One Belt One Road initiative and an ongoing construction boom.

U.S. steel prices in particular are high as a result of strong demand from a growing economy. Domestic steel production is up 4.4 percent, and imports are also up in a bid to meet demand.

“That’s what makes this move to increase tariffs now so surprising,” Brennan said. “The conclusion is that Trump is doing this as a negotiating tool, a hardball tactic, as part of his ‘America First’ approach to international trade.”

Threatening project viability

For those on the breakbulk logistics frontline, charged with the safe transit of heavy industrial plant and equipment, anything that increases steel prices could lead to a slowdown in construction.

Louis Perrin, director of Hemisphere Freight Services, a global logistics provider, points out that much of the U.S. steel imports are used in manufacturing, construction and defense sectors, which could see costs rise. “As a result, projects may become no longer viable, which of course would have an adverse effect on project logistics companies, particularly focused on these sectors,” Perrin said.

Oil companies are already running a slide rule over their budgets to see how tariffs may impact new developments awaiting final investment decisions. Wael Sawan, who heads Shell’s deepwater operations, recently told Reuters the tariffs could materially impact some U.S. Gulf deepwater projects. DowDuPont also has warned of the impact on its next wave of U.S. Gulf petrochemical expansion. Last year, the chemicals giant spent $6 billion building plants along the Texas Gulf Coast, which contained $1.2 billion worth of steel. The tariffs would have added $300 million in costs.

Indeed, the American Chemistry Council, which represents a petrochemicals industry rejuvenated by low feedstock costs resulting from the country’s shale gas boom, said the tariffs come “at the worst possible time.”

It warns that more than half of the $185 billion investment in new factories, expansions and facility restarts across the U.S. are still in the planning stage, and that investors could be driven elsewhere as a result of the tariff increases.

Weighing impacts

For now, heavy users of steel are still weighing the impact of the Section 232 measures.

“The short answer is: it’s too early to know the potential impact,” said a spokeswoman for Shell, the global oil giant.

“Based on our current conversations and understanding, there’s a commitment on behalf of the energy industry and the administration to work through the implementation and application of the tariffs. Our goal is to better understand the specific parameters and what, if any, exemptions might apply to Shell’s current and future projects.”

It’s not all doom and gloom, however. Perrin of Hemisphere Freight Services points out that the logistics and project logistics industry is adept at adapting with changing trading conditions.

“It’s a constant dynamic in the world in which we operate,” Perrin said. “No matter what politics, business or even natural events occur, we are quick to act and remain agile in ever-changing environments, whether that be delivering aid to disaster zones or providing logistics services and vessels to markets all over the world. We strive to meet our clients ever changing demands and business markets.”

At the time of writing, the EU and fellow steel powers were still negotiating with the U.S. in a bid to secure an extension of the current waivers. Clearly Trump is looking to reduce U.S. trade deficits with its trading partners and is willing to do deals that fit his America First template.

The key is to keep talking because the big fear is that an escalation will lead to retaliatory tariffs applied to a whole host of industries, with many in the EU fearful of U.S. action against the trade bloc’s important car industry. And if we get into a real global trade war, cautioned S&P Global Platts’ Brennan, “everyone suffers.”

— Amy McLellan has been reporting on upstream oil and gas and maritime industries for 20 years. This article was originally published by Breakbulk Magazine and was re-published with permission from the company.

Photo courtesy of Arcelormittal