Final Thoughts

That 50% tariff threat on Brazilian imports has halted pig iron activity in the Brazil-to-US trade flow. US mills buy pig iron 90 days in advance of its arrival at their plant. The disruption has already started.

Ticking clock

The Brazilian producers are waiting on news from the US-based mills with orders pending for shipment during August. These shipments may be subject to the tariffs the Trump administration is proposing to place on Brazilian imports. A decision must be made soon because of the pre-financing aspects of buying pig iron from Brazil.

Background

Brazilian purchases of pig iron are usually pre-financed by buyers, whether they are steelmakers or traders. The buyers issue a Letter of Credit (LC). This permits the seller to draw up to 85% of the value as partial deliveries are made into inland warehouses in advance of the actual contracted shipping date of the entire cargo from the port of loading. After the cargo is loaded, the remaining 15% is drawable from the LC less a financing charge.  

For August cargoes, this means the shipments into the inland warehouses should be happening now. That is, it takes time to ship the pig iron to the coastal marshaling area where the cargoes are transferred to the port and loaded onto vessels for shipment to the US.

Once payment is made for these partial shipments, the material is technically the property of the buyer under a Forwarder’s Cargo Receipt (FCR). So, those funds are not recoverable by buyers in the event of an order cancellation, at least not without a lengthy court battle depending on the terms of the contract. 

What’s happening now?

It is still not clear whether these shipments for previously contracted material for August shipment have occurred. But sources say it is likely some have been made. This is in order to meet the requirement of August shipment from Brazilian ports.

We’ve checked with our sources in Brazil, and they still say there have been no decisions made by US buyers about August shipments. The tariff is due to start on Aug. 1 (unless pig iron is exempted or a trade or political deal is made).

There has been some speculation the Brazilian producers could share the tariff burden with US mills to keep material flowing. If each shared the tariff equally it would cost each party ~$100 per metric ton (mt). 

We’ve talked to Brazilian traders who are skeptical about this likelihood.

As things stand now, pig iron trade activity from Brazil to the US remains a question mark until the tariff threat is known one way or the other. The feeling is if the tariff increase happens, the market disruption will be ongoing. This will lead to negative impacts for both buyers and sellers. 

On the Brazilian side, the implementation of these increased tariffs will likely cut off shipments of pig iron and other semi-finished steel products to the US. The US is Brazil’s largest customer for pig iron, accounting for 90% of their exports. 

In the US, the absence of Brazilian pig iron shipments will cause a spike in price for ferrous scrap and any other available ore-based metallic substitutes. There are not too many available, at least not with a price tag this side of the stratosphere.

There is no sense in underestimating the gravity of this situation. Two options exist if the EAF mills producing hot-rolled coil (HRC) don’t have access to a reliable and reasonably priced source of a material that can reduce the residual alloys in their scrap charges. Either their quality will suffer or their production costs will significantly rise. This could leave them vulnerable to imports or domestic integrated production.

Solutions?

One way or the other, things will work themselves out. The only question is how.

There are ways to remedy this possible economic debacle. If the Trump administration really wants to help the steel industry (which I believe they do), they should simply eliminate all tariffs on steelmaking raw materials. This would include pig iron, HBI/DRI, ferrous scrap and ferroalloys. If they love tariffs so much, just keep the tariffs at 10%.  I believe the trade could live with this as opposed to the alternative. One thing is likely, placing tariffs on essential imports of ferrous raw materials will have the reverse effect of helping the steel industry.