The potential impact of US tariffs on aluminium and steel markets

Principal Analyst, Alex Griffiths, shares his thoughts in a Q&A session during the Thomson Reuters Global Base Metals Forum. The below information is quoted from the 5th April 2018.

The United States has imposed a 25 percent duty on steel imports which is expected to reshuffle global trade. What does this mean for the world’s major steel producers, and for the domestic US industry? Will consumers have to pay more in an “own goal” for the States, and what are the odds for this trade spat to escalate and disrupt global growth?

Q: There’s been a lot of coverage on the steel and aluminium tariffs recently and this week we’ve seen an escalation in the trade spat between the U.S. and China. Perhaps we could start by going through the tally of which countries have exemptions: Argentina, Australia, Brazil, Canada, Mexico South Korea and Europe.

Do you expect any more?

A: It is important to note that although South Korea are exempt from steel tariffs - they are on a quota volumes must be limited to 70% of average volumes 2015 to 2017. Japan initially expected steel users to ask for exemptions on a case-by-case basis, but has now asked for an exemption. Japan will feel aggrieved if they are not granted an exemption. Japan and US Japan will feel aggrieved if they are not granted an exemption. Japan and US voting patterns at the UN general assembly are relatively similar suggesting a similar foreign policy and perhaps demonstrating that Japan is not a threat to US national security.

So perhaps Japan is the most likely candidate to be added to the list of exemptions. Russian producers are also seeking exemptions – NLMK for slab. But we think NLMK's slab imports will be cost effective even with the 25% tariffs. But things change fast with this story so we could well see even more exemptions.

Q: How big an impact do you think the tariffs could have on global steel trade?

A: Around 4 Mt of US imports are at risk of being displaced, but we think it could be higher – up to 10 Mt. Of those not currently exempt, China is sending very high value steels to the US which are difficult to source elsewhere – the duties will likely be absorbed and imports continue.

Chinese steel imports to the US are high value because Chinese commodity grade steels typically do not get sent to the US as they are subject to anti-dumping duties already and are therefore not cost effective.

Russia and Turkey are sending low value commodity grade steels to the US. Russia in particular is sending semi-finished steels at a value that even with a 25% duty on top, should continue to be economically viable.

Steel from South Africa, Thailand, UAE, Vietnam and Ukraine is commodity grade, low-value. This steel is the most likely to be displaced if a 25% tariff is applied. A portion of steel from Japan could also be displaced – although Japanese steel makers believe the steel they are selling to the US is hard to substitute and expect downstream users of its steels to seek exemptions. The sum of 2017's steel imports from these 'at risk' countries is 4 Mt. However, the tariffs will boost US steel prices which in turn will encourage greater import volumes from exempt countries.

We think that if price rises do encourage more imports another wave of protectionist measures is likely – possibly in the form of quotas. Quotas will further reduce import volumes by the end of the year. 2018 could see as much as 10 Mt less US steel imports than 2017.

Q: Presumably it means the steel that would have been shipped to the US will go elsewhere? How much crude steel does the U.S. currently produce?

A: Yes probably steel destined for the US will go elsewhere, but where demand would be strong enough to absorb this remains to be seen. And, if steel is shipped to the next highest priced market – the EU for example – then, as the EU is exempt from tariffs, it could ship its own steel on to the US. Not transshipment but using cheaper steel imports to feed domestic demand and exporting steel.

The US made 82 Mt last year but we expect that to rise this year as domestic steelmakers benefit from healthy domestic demand growth and reduced imports. Steel output could be as much as 95 million metric tonnes this year. But that is not all due to the 232 effect - domestic steel demand is rising regardless.

Q: Which other regions could be affected by greater steel imports?

A: Steel prices in the US are pretty consistently higher than in the rest of the world. If steel destined for the US is re-routed elsewhere then the most likely outcome is that it will be sent to the next highest priced market. The EU is a likely candidate as typically steel prices are relatively high in the EU. But the EU has anti-dumping measures in place and is also considering safe guarding duties. A straight 'destination swap' is unlikely - we are more likely to see a reshuffling of global trade. But global finished steel imports stood at about 400 million tonnes last year and so a 10 million tonne reshuffle may not have a huge impact on any one destination.

Q: Are the tariffs an “own goal” for the U.S.?

A: It is certainly negative for US downstream users of steel and manufactures who will have to pay more for their raw materials. It will either squeeze manufactures margins or potentially raise prices for everyday Americans who buy manufactured goods. Far more people are employed in downstream manufacturing than in crude steel production so on the face of it the policy puts more jobs at risk than it secures. Of course, if this is all a negotiating tactic – the art of the deal – to get NAFTA concessions or some other political motive, then there could be benefits for the US outside of steel and aluminium.

Q: Do you think we’re at risk of seeing global growth stall due to the trade spat? What’s your scenario for how it will end?

A: If a trade war develops then yes we could see global growth stall. but we still judge that to be an outside risk. But - if a trade war develops then global economic growth could slow from 2.9% to 2.2% over the next 4 years.

The latest tariffs announced on US$60 billion of exports are far more significant for global economic growth than the steel tariffs. Although the effect on both China and the US of this is minimal - $60 B is just 0.4% of China GDP and in the US consumers may have to pay more for imports - the effect on inflation and growth will be minimal.

The main concern is retaliation and escalation. And whether or not the measures will be imposed in full - we have already seen that the Section 232 measures on steel were not rolled out in full as the list of exempt countries grows. But if a trade war does develop - not just between US and China but other major trade partners like Canada and Mexico - there are no winners in such a situation. Introducing protectionist measures does the economies of both sides more harm than good.

Q: Do you think this will support US steel industry in any way?

A: Well, yes they will certainly support crude steel makers. Primary metal makers. We have already seen US HRC prices boosted by 30% - the tariff was only 25%. We have seen announcements of idled steel capacity ramping up. So yes tariffs will support crude steel makers - but of course that immediately raises prices for first users of steel. Such as manufactures, the automotive industry, steel intensive construction.

Q: So at the end of the day it is good for some political bragging but it’s a disaster for downstream.  

On the aluminium side, the restarts of smelters seems to more depend on power prices than tariffs- how much capacity do you see (and jobs) coming onstream because of the tariffs?

Are any other metals caught in this trade war that haven't hit the headlines?

A: I am not an aluminium expert. This is true about the power prices. If you are a Wood Mackenzie subscriber there is an excellent insight called 'Cracks emerge in Trump’s Section 232 aluminium tariff wall' which discusses this. Purchase it here.