Trade Cases

CRU: Quotas Would Only Add to the Volatility

April 18, 2019

Steel interests in North America and the rest of the world are watching intently to see if the Trump administration grants some tariff relief to Canada and Mexico to clear the way for final approval of the new U.S.-Canada-Mexico Trade Agreement. One possible compromise being discussed (albeit one so far opposed by the U.S. trading partners) is replacing the 25 percent Section 232 tariffs on steel with some form of quota.

Speaking during a webinar hosted by CRU and the CME Group earlier today, CRU Principal Analyst Josh Spoores said quotas may help secure the trade agreement, but will only add to the price volatility plaguing the hot rolled market.

What form the quotas might take is still unknown. There is precedent in quotas on South Korean steel, which limit their exports to the U.S. to 70 percent of historical averages. In the case of Canada and Mexico, it’s more likely the quotas would be set at 100 percent of recent shipments so as not to punish the two nations but to prevent a surge of steel into the U.S. once the tariffs were lifted, Spoores said.

Quotas might help secure the NAFTA 2.0 trade agreement, but will only worsen the volatility in steel shipments and pricing, Spoores predicts. In situations where quotas are set by quarter, such as finished steel from South Korea and slabs from Brazil, imports tend to be front-loaded. The result is a dramatic increase in imports and prices in the first month of each quarter, followed by declines in both as the material is processed and released into the market.

“Quotas would lead to much higher volatility throughout the year,” Spoores said.