Trade attorney and Steel Market Update contributor Lewis Leibowitz offers the following update on events in Washington:
On an earnings call last week, Aditya Mittal, president and CFO of ArcelorMittal, the single largest steel producer in the world, stated that “Section 232 has been successful because it has spurred a lot of investment in the U.S. steel industry, so to backtrack [quickly from Section 232]…would be difficult for either candidate in the White House.”
Not so fast.
There have been projects announced by steel producers in 2018 and 2019 in reaction to the Section 232 import restrictions, but Section 232 is under challenge both in Congress and in the courts. The constitutional argument is over, but several statutory challenges remain.
In addition, there is growing evidence that Section 232 tariffs may have been more successful in relocating downstream steel-using manufacturers to other countries than in causing steel producers to invest in new steel production facilities. For evidence one needs look no further than the “successor” Section 232 investigations, orders and threats during 2020—“derivative” steel and aluminum products; transformers and transformer components made from electrical steel; vanadium; mobile cranes; and threats to reimpose tariffs on aluminum and perhaps steel from Canada and Mexico and to change the quotas on steel imports from Brazil (just this week). These additional administration initiatives stem from the ineffectiveness of the steel and aluminum tariffs in strengthening the steel industry.
I’ve written before about the actual impact of Section 232 tariffs on steel imports. Based on official import statistics on imports of steel, less than 20 percent of steel imports by value are subject to tariffs. This is not a perfect analysis, but based on the numbers for 2019 compared to 2020, the steel imports subject to tariffs have been cut nearly in half (from 31 percent to 17 percent). The investment announcements Mr. Mittal alludes to all predate 2020. Timna Tanners, the prominent steel analyst at Bank of America Merrill Lynch, has noted that if all these steel investments are actually built, the weaker steel producers will be driven out of the market (“Steelmageddon”). Many of those weaker producers are in the U.S.
I am not predicting an end to Section 232 tariffs at a specific time, nor am I predicting that no further Section 232 actions will be taken by this administration. However, it is now clear that Section 232 is not enough to turn the U.S. steel industry around into a globally competitive actor. Major U.S. markets (construction, automotive, heavy equipment, capital machinery) will therefore need imports for the foreseeable future; and the products that are imported will tend to be leaders in advanced technology and efficiency until domestic companies are able and willing to invest in the new technologies.
Moreover, the industry awaits a number of decisions that will constrain the administration’s freedom of action under Section 232, including tariffs imposed after April 11, 2018 (the 90th day after the Department of Commerce “Steel Report” was transmitted to the White House), the “derivative” tariffs announced in January 2020 and other actions, threatened or already taken.
Another theme affecting these projects is the continuing economic disaster caused by the coronavirus pandemic. A number of steel producers and downstream producers remain closed; others are operating well below their capacity. The current spike in cases in many parts of the nation are making it more difficult to justify these new investments. The Steel Market Update market survey reports considerable apprehension about the strength of the industry for the remainder of this year and into next year. This tracks market concerns from other sources.
It is unlikely that any announced capital investments will be cancelled before Nov. 3, election day. There are no guarantees of what will happen after that.
One investment has been sharply scaled back. U.S. Steel announced late last year that its $1.2 billion investment in the Mon Valley Works will be scaled back because the company’s higher priority is to pursue its newer investment in Big River Steel, a new electric arc furnace (minimill) facility.
As we draw ever closer to the 2020 elections, an air of increasing distress seems to be taking hold in the Trump camp. The Trump campaign has changed direction several times, signaling that it is trying out several approaches and that it is not sure which one will be successful. The publicly announced polls uniformly have President Trump behind. Of course, they did in 2016 too—but this year is different in many ways.
Steel producers may feel that the capital investments announced in 2018 and 2019 are enough to compel the administration (this one or the next one) to keep Section 232. But the reality is complex and subject to major change.
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