Trade Cases

SMU Q&A: Trump’s Tariffs Only Temporary?

Written by Tim Triplett

The Trump administration’s announcement today that it would not spare its closest trading partners from the 25 percent tariff on steel imports surprised many in the market. Effective at midnight, steel from Canada, Mexico and the EU countries will be subject to the same penalty as exports from China and other so-called “bad actors.” Steel executives canvassed by Steel Market Update today expressed a range of emotions with two common themes: prices are likely to get a further boost and trade negotiations are far from over, so the tariffs may be only temporary. Following are some of their more insightful comments (sources were granted anonymity so they could speak freely):

Q: Were you surprised the administration did not exempt the United States’ closest trading partners?  

A: “This was no surprise at all. Trump is frustrated with the lack of progress and wants to get a deal done.”

A: “I was not surprised. I expect that eventually the issues will be worked out and adjustments will be made.

A: “I am not surprised. I think the administration has been consistent in playing hardball to get concessions in the tariff/quota situation. If they get some concessions, they will remove or lessen the tariffs, but the impact will shut down the supply chain from now until such time as a different arrangement is reached. I don’t think this is the end.”

A: “I was very surprised, but not shocked. No one knows what this administration is going to do.”

A: “We were very surprised by the president’s decision to enforce tariffs on Canada, Mexico and the EU. This will have an immediate impact on both spot market and Q3 contractual pricing. We believe this decision is so impactful that negotiations will be expedited and a resolution to reverse the action will happen quickly. The president is, however, playing with a massive Trump card.”

A: “I was surprised. I expected Trump to keep the uncertainty going and push the decision to July 1. I think he put the tariffs in place to speed up the NAFTA talks. If progress is made on that front, I expect he will back off on the tariffs and put quotas in place.”

A: “We were more than slightly surprised. Including NAFTA countries was completely shocking. Everything the president had done up to this point, for the most part, was helpful. But this is so disruptive, it’s hurtful. This is going to raise the price if he doesn’t change his mind. If we weren’t already at the point we would push manufacturing away, this is going to do it.”

A: “I was very surprised, but there’s much left to be seen. A tweet can change a lot in just a moment.”

Q: Do you think this will have a big impact on the market (availability, pricing, etc.) or is the effect already “baked in”?

A:A fair amount has been baked in, but I expect the mills to keep pushing the spot market upward to target past historical highs achieved in 2008. The spot market will be inflated considerably, and I expect any buys to be very conservative.”

A: “It will have a big impact, and futures and CRU/Platts will show that. There is still not enough steel supply or capacity to replace all of these tons. Adding 25 percent to Mexico and Canada pricing is a game changer—$1,000/ton HR.”

A: “This will have a big impact on plate over 3 inches. It will raise prices. It will be trickier for us all going forward. We will all have to navigate it.”

A: “Consumers were spared the bigger effect of quotas (reductions from previous levels of exports). The effect on pricing of even very modest quotas would be outsized. Because the NAFTA countries paying the tariffs is such a surprise, I think there will more upward price pressure in the U.S.  The EU, less of a surprise, so less new pressure on pricing. In that prices are pressured higher, and that negotiations will likely continue (this isn’t the final word, so the uncertainty continues), the business is affected.”

A: This will have ramifications, most likely immediately. I expect outright shortages by fall at the latest.”

A: “This will likely cause yet higher steel prices, which will be passed on to OEMs and the rest of the manufacturers, which is very negative. I expect these moves to cause companies to seek alternatives (purchasing parts/goods offshore) faster than they otherwise might have done. The recent actions of this administration have devolved into extremism on trade. The smart money is to expect the worse outcomes, then if things settle it will be to your benefit.”

A: “I believe the current pricing already reflects the market and availability. I believe the domestic steel suppliers fully understand the risk of pushing spot prices higher right now, knowing that they could draw imports back into the country, and the potential for being perceived as gouging during this time of uncertainty. That being said, I do believe the mills are already using this news to begin to set the table for 2019 contract negotiations.”

A: “If the tariffs stick, most steel manufacturers will be in full blown recession in 12 months.”

Q: How do you expect it to affect your business?

A:I expect it will knock us out of the spot market for the time being.”

A: “It will affect our business significantly. There’s no time to plan, and steel moving across the border tomorrow is 25 percent higher. Domestic mills are very happy, but they still cannot make enough steel. They are growing profit on the back of U.S. manufacturers; we are the ones that will suffer. More jobs will be negatively affected with these high prices—not your multibillion dollar companies, your small-medium size U.S. manufacturers.”

A: “Our concern over an extremely tight supply situation over the next six months became quite real this morning. We’ll begin discussing open orders with the mills tomorrow and figure out if my replacement cost just went up by 25 percent or not.”

A: “Lack of visibility and understanding of market direction makes any business more difficult to manage. Now is the time for steel consumers to really reflect upon what they need to support their business, and partner with their suppliers to ensure they have support. Relationships are key in times of instability. We’re actively in dialog with our customers trying to determine how to best insulate them from these dynamics.”

A: “At a minimum, you will have to sit down and redo your deals. We are bringing steel in from Canada on the automotive side. Those tons are all indexed. If you add 25 percent on top of an indexed deal, you’re toast. You can’t do that and stay competitive. There is not enough steel being produced in the U.S. for us to be self-sufficient. It’s just way too much, and we are going to really regret this.”

A: We’ll see new customers come out of the woodwork when their traditional suppliers either raise prices or fail to have product. It could be good for us.”

Q: What does this portend for the NAFTA negotiations?

A: “This puts greater pressure on getting an agreement in place. If they can’t work out an agreement, it will end and change the dynamics of trade considerably for North America.”

A: “I think the administration is using it to apply leverage to our NAFTA partners – the end game is NAFTA content, not ‘mildly”’transformed Chinese product coming into the states via a NAFTA partner. The administration wants our partners to help police Chinese trade.”

A: “This is going to make the NAFTA negotiations challenging. I see Canada reaching an agreement, while Mexico will be difficult.”

A: Canada should do its own deal and FAST!”

A: “I think it may cause Canada and Mexico to increase their desires to trade with other global partners and less with the U.S. The president might face flak from Congress. There might be some bluff calling ahead, as well. It’s possible that Congress could prevent the president from exiting the agreement, and they have to approve a new one, so that complicates matters.”

Q: Do you view this as a positive or a negative for the U.S. economy?

A: “Negative, a massive recession in early 2020.”

A: “This will have a VERY NEGATIVE impact on the economy. The consumer market will not be able to stomach these large price increases. Hot roll just got very expensive overnight. 

A: “It’s a potential way of bringing back jobs to this country that were exported to satisfy stockholder equity because it was an avenue to reduce corporate costs. It could just end up inflating the cost of products for the consumer as costs are passed on. The question I have is what is the government going to do with the tariffs once they collect them? Where does the money go and where will it be put to use?”

A: “It will have both positive and negative effects on the U.S. economy. Some folks will come back to USA supply, some folks will move more manufacturing overseas to go further in the supply chain and ship tariff-free sub-assemblies or more finished goods into the USA. We have been seeing that since the threat of the tariffs was announced.”

A: “I think increased domestic manufacturing is of underestimated importance to the U.S. economy. I think the cost of steel in products manufactured in the U.S. is overestimated in terms of the overall pricing of the products. There may be more elegant ways to begin changing our trading patterns, from multilateral agreements where we are not fully rewarded for the scope of our overall consumption, to bilateral deals where a better reflection of the correct value of trading is more evident. I see the end result of using this leverage being a positive for the country, but it isn’t a smooth trip.” 

A: “I think Mr. Trump will be shocked at the vigor of the retaliatory measures that these people take. I sure hope he takes a deep breath and says maybe we need to take a step back. If this stays in place for more than a week, I would be shocked if we are not soon being quoted hot rolled that starts with a 5.”

A: “There are positives and negatives depending on the product and location, but overall it’s a positive for the economy. The U.S. has been abused by unfair trade for decades; time to cut the head off the snake.”

A: “I’m assuming much of this is positioning and that ultimately cooler heads will prevail.”

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