International Steel Mills

Section 232: Will They or Won’t They?

Written by Sandy Williams

The “will they or won’t they” drama around Section 232 and whether the Trump administration will place tariffs on steel imports is reaching a peak. The Department of Commerce is expected to announce its findings on the Section 232 investigation by the end of next week. According to CNBC, a draft of the report has been circulated to White House advisors and, with the temporary pause on the health bill initiative, a decision may be forthcoming from the president in the next few days.

“There is a lot of anticipation that there is going to be a statement by the Commerce Department today or later this week that suggests Trump impose something like the 232 tariffs,” Aldo Mazzaferro, managing director at Macquarie, told CNBC.

Section 232 is, unsurprisingly, receiving strong support from U.S. steel mills. In a recent interview with Bloomberg, Nucor Chairman and CEO John Ferriola said he is encouraged by the administration’s determination to make sure the U.S. has a sustainable and strong steel industry. “We recommend that they start with the end in mind,” said Ferriola. “At the end of the day, this is being done to provide a sustainable steel industry for a sustainable national defense. To accomplish that, you have to have a limit on the imports in terms of the market share they capture. There has to be enough market share for the domestic mills to operate and a utilization rate that is somewhere between 85-87 percent, which allows us to collect the return on capital that allows us to have a sustainable industry. To accomplish that goal of 85-87 percent utilization, you have to have imports limited to about 10-15 percent of the market share here in the United States.”

Cliffs Natural Resources President and CEO Lourenco Goncalves said he expects Secretary of Commerce Wilbur Ross to prevail on the Section 232 action. In comments to Cowen & Co., Goncalves said he expects Section 232 to result in tariff quotas, with import market share falling into the low teens from the current 25 to 30 percent share. As a consequence, hot rolled prices could increase to $800 per ton (the current SMU HRC average is $605 per ton). Were it not for opposition by economic advisor Gary Cohn and Treasury Secretary Steve Mnuchin, the trade action would already be announced, Goncalves said.

The American Iron and Steel Institute (AISI) supports import restrictions and stronger measures to address global steelmaking overcapacity, especially in China. In his testimony at the Section 232 hearing, AISI CEO Thomas Gibson noted that steel imports are on the rise in 2017, up 19 percent in the first three months of the year compared to the same period last year. Finished steel imports have taken a 26 percent share of the U.S. market. AISI hopes for “a more comprehensive and broad-based program of action to safeguard America’s national security.”

On the other side of the fence are manufacturers who urge caution on any broad-based restriction of steel imports. Steel fabricators and manufacturers of steel-intensive products fear the loss of affordable foreign steel. Hikes in domestic steel pricing as a result of trade action could price their products out of the market, opening the way for foreign competitors, they say.

U.S. hot rolled prices are already 39 percent higher, and cold rolled 47 percent higher, than the export market, said Stuart Speyer, president of storage manufacturing company Tennesco, citing SteelBenchmarker prices.

Some believe that import restrictions will make U.S. steel producers less competitive globally. “Long term, this protectionism is definitely a risk to the manufacturing sector in the U.S.,” Mazzaferro told CNBC. “We can’t do much more than we’re doing other than risking a demand contraction.”

The American Institute for International Steel, which represents foreign mills, has urged the administration not to rush into a decision and to reopen the hearings to allow more discussion. Richard Chriss, president of AIIS, told Commerce that further hearings would “allow us to step back and take a deeper, more careful look at what we ought to do, and what the consequences of implementing Section 232 trade restrictions will likely be.”

There are also some steelmakers who import slabs for further processing that say they will be harmed by blanket restrictions on steel imports. California Steel Industries says that the kind of steel they need for their business is not readily available domestically. As the largest steelmaker in the western U.S., CSI produced 1.4 million tons of steel in 2016 from slabs primarily imported from Mexico, Brazil and Japan.

In a letter to the Department of Commerce, CSI wrote, “CSI’s necessary dependence on imported slabs is easily understood by our geographic distance from potential slab suppliers in the eastern U.S., and by the fact that the few remaining domestic integrated mills have a history of producing slabs only for their own intracompany consumption.” CSI encourages Commerce to continue the fight against unfairly traded imports of finished steel products, but to not impose tariffs, quotas or other restrictions on steel slab imports.

Ports that rely on steel imports for revenue, like the Port of New Orleans and the Port of Los Angeles, also are requesting that the administration consider the impact of import restrictions on port and supply chain jobs.

NATO allies and global trading partners are seeking exclusions from import actions and looking into retaliatory measures should exports to the U.S. be impacted. The agriculture community is especially concerned that it will be the choice for any retaliatory trade restrictions imposed by disgruntled foreign nations.

Commerce Secretary Ross has acknowledged that he expects challenges both domestically and by the World Trade Organization to any action that may be taken.

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