Leibowitz on Trade: Perspectives on Inflation

Inflation is a national problem. But in certain sectors it can feel good. Case in point: steel prices over the last year. SMU’s hot-rolled coil price peaked at $1,955 per ton ($97.75 per cwt) in early September, more than quadruple a 2020 low of $440 per ton. Prices have since softened, according to SMU’s interactive price tool. But those declines, even though they total hundreds of dollars per ton, are still comparatively modest.

Yet the price of iron ore has declined substantially. Some estimates say that iron ore prices have declined 40% or more since the summer. An apparent slowing of steel production in China is in part causing the slump in iron ore.

But one thing is for sure—steel companies are enjoying an enormous gap between finished steel prices and the cost of one of their most important raw materials. For example, Cleveland-Cliffs reported third-quarter 2021 revenue of $6 billion, compared to $1.6 billion a year ago. Profit was $1.2 billion in the third quarter of 2021, up from a loss of $10 million one year earlier.

Admittedly, Cliffs is a different company from a year ago, due to some impressive acquisitions. Nonetheless, the performance is spectacular.

Nucor’s results are similarly impressive. Gross revenues in 2021 were over $31 billion, $11 billion (45%) higher than 2020. Gross profit for Nucor was $8.2 billion, up $6 billion (270%) from 2020 levels.

If you are Cliffs or Nucor, price inflation does not matter. But it matters to their customers. Capital-intensive industries like steel and aluminum are not seeing their investment costs increase because interest rates are being kept low. Steel-using manufacturers, however, are not so fortunate.

Each market has its own characteristics. Many in the steel supply chain are hurting, while others are prospering. The market, if it’s allowed to work, will sort these things out over time. But for now, there is no mystery in the silence from Big Steel about the problems with inflation.

One of the key variables in many industries, such as metal users and retailers, is inflation and interest rates. In steel, the United States is now the market with the highest prices. As long as the Section 232 tariffs, antidumping/countervailing duty cases and the China Section 301 tariffs remain in effect, imports’ ability to take some of the sting out of inflation is limited. But imports of steel and aluminum are vital to the success of downstream industries in this country—steel and aluminum production does not meet domestic demand and hasn’t for decades. Moreover, specific products are simply not available from domestic producers, making imports the only option.

That is why the tariff exclusions program is so important. Since June 2019, nearly 220,000 steel exclusion requests have been submitted to the Commerce Department, of which 152,000 were granted.

Almost 15,000 requests have been submitted for aluminum in the same time period, of which about 11,600 have been granted. At the outset of the Section 232 tariffs, Commerce predicted about 4,000 steel exclusion requests.

The workload was so much greater than anticipated that Commerce came up with a new idea—to create categories of “generally approved exclusions” (or GAEs) where importers and domestic manufacturers would no longer need to file product-specific applications. More than 100 products were accorded GAE status, indicating a lack of objections by domestic producers to exclusion requests for these products.

Domestic steel producers complained about GAEs. They argued that domestic producers might have failed to object to exclusion requests even though they could produce the requested products.

Just last week, Commerce significantly reduced the number of GAEs, claiming that the established criteria for GAEs were not met for some products that were granted that status. We all make mistakes; but Commerce went on to remove GAE status effective on Dec. 27 (providing only 17 days’ notice), meaning that some imports on the way from foreign locations will be subject to 25% tariffs (on steel) or 10% tariffs (on aluminum) when they were not subject at the time the ship set sail. Importers will be surprised when the imports arrive that they are 25% more expensive. That is a risk that importers and downstream manufacturers should not have to take, but bear it they will and pay for the mistakes of the Commerce Department. From now on, importers need to treat GAEs as uncertain, requiring new purchases to be covered by individual exclusion requests.

Another sign of tension between the stakeholders in steel and aluminum exclusions is in court. Steel companies have tried to “intervene” in court cases that challenge denial of exclusion requests. The exclusion requesters sue the Commerce Department claiming that the exclusions were unlawfully denied. Domestic steel producers have been asking to get involved in these cases through intervention. This means that a company wishes to involve itself in a case even though it was not named a party in the case at the beginning. In general, intervention may be granted by the court if the party seeking to intervene will be directly affected by the outcome of the case, and no existing party to the case (i.e., the government in this example) will adequately protect the proposed intervenor’s interests.

When the Commerce Department’s Bureau of Industry and Security (BIS) denies an exclusion, the steel companies are essentially arguing that the government will not protect their interests. The courts have held that the steel companies are not entitled to intervene. They have now appealed to the Court of Appeals for the Federal Circuit to gain the right to participate in exclusion cases. If the domestic companies succeed, the government and plaintiffs will find it harder to resolve these cases.

The economic problem of inflation, caused in part by too much government intervention in markets, will affect investment and production decisions of U.S. manufacturers and traders and their foreign counterparts. The longer these measures last, the more lasting the distortions are likely to be. Government intervention is never free of costs—downstream users of steel and aluminum, which play a much larger role in the U.S. economy than steel and aluminum producers, need to be considered too. Especially now, with producers making unprecedented profits, more attention needs to be paid to those downstream users. Our prosperity depends on getting these complex issues right.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz
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