In a recent update on the ongoing case under section 232 of Trade Expansion Act of 1962, U.S.’s President Mr. Donald Trump hinted about a likely imposition of the flat tariff of 25% on all steel imports coming from any country.
In our previous article dated 17 Feb’18, we have covered about U.S. Commerce Department recommendation for imposition of heavy tariffs or quotas on foreign producers exporting steel to the U.S., under section 232 of Trade Expansion Act of 1962.
The Section 232 imports probe, was initiated to probe the national security implications of steel imports, and included recommendations of three options to the U.S. government which were:
• A global tariff of at least 24% on all steel imports from all the countries.
• An alternative option was to target 12 countries (including India, China, and Vietnam, to name a few) who export the majority of cheap steal to the U.S. Those countries would be charged new tariffs of 53% or higher. In this scenario, countries not listed in the list would see US imports capped at the amount they imported in 2017.
• A third option was to institute a quota on steel imports from all countries, up to 63% of what those countries imported in 2017.
From the above three options, the U.S. government has hinted to adopt the first one; of global steel duties of at least 24% on all steel products (including semi-finished and finished steel) from all countries across Asia, Europe, and even NAFTA (North American Free Trade Agreement) countries.
Why is this happening?
• U.S. has turned in to one of the largest steel importers in the world especially ahead of Germany and South Korea which hold number two and three spots respectively. If we look at U.S. trade numbers, country’s steel import exceeds its export as much as four times.
• According to U.S. customs data, the country imported about 30.1 MnT of steel in 2017 out of which percentage of flat steel imports is the highest with around 39% at 11.8 MnT. This is followed by pipes and tubes that has percentage share of 25% at 7.63 MnT, semi-finish products with a percentage share of 17% at 5.13 MnT and finish long at 4.85 MnT with a share of 16.1%.
• According to reports, the steel production in U.S. fell by 11% between 2014 and 2016, while demand has been increasing continuously. Although steel production rose by 3% in the first three quarters of 2017, the increase in demand still outstripped it.
• As per U.S. government statistics for that period, the main countries filling the gap between demand and production were Canada, Brazil, South Korea, Mexico, and Russia. However, in terms of countries whose steel exports to the U.S. have increased are India, Russia, Taiwan and also EU (European Union).
• In 2017, U.S.’s highest steel import was contributed by Canada with a percentage share of 17% country’s total steel imports followed by South Korea (13%), and Brazil (12%). Mexico is ranked fourth (9%), then Turkey and Japan each with a percentage share of 7% each.
• Due to this, the new government that came into power in U.S. opened a “Section 232” investigation into the steel and also aluminium import deficit, with an intention to figure out whether these imports are a national security issue.
The likely impact of US Tariffs:
On Raw materials and Steel products
• The first and foremost impact of the U.S. tariffs is likely to be in the form of excess availability of steel products that were imported by U.S. With the import restriction, all those products that were exported to U.S. will now be available in excess quantity for consumption in the global market while the global demand will continue to remain at similar levels.
• This demand-supply mismatch may lead to fall in global steel prices in the coming months. However, the upward trend in prices will be short-lived and that the prices will normalise after the adjustment of market dynamics in the long run.
• Another impact that is likely to be witnessed will be on U.S.’s domestic steel market. With the import restrictions in place, domestic mills in the country will have to increase their production to meet the country’s in-house demand. However, the domestic steel prices may surge in the short run till steel mills adapt themselves to meet the country’s demand.
• U.S.’s tariff restrictions will also lead to increase in domestic consumption of scrap for steel production via EAF (Electric arc furnace) route. As U.S. is one of the key scrap exporters in the world (with % share of 37% in world’s total scrap exports), the availability of scrap in the international market would decline and that its prices may increase comprehensively in the coming months.
• With the restriction on scrap availability in the global market, various countries’ steel producers will have to opt for billet as their feedstock to produce long steel products which would eventually lead to increase in billet’s both demand and price universally.
On various countries in the world
• With the recommendation of Section 232 by U.S.’s Commerce Department, the highest impact is likely to be seen in South Korea which is country’s largest steel exporter followed by Turkey and Japan. As U.S. is a big market where countries export their cheap steel output, restriction by U.S. would result in the excess availability of material in the global market which may make the global steel prices to fall if there is no corresponding increase in global demand for steel from rest of the countries.
• Another country which is likely to be hugely impacted by U.S. import tariff is China. This is because although Chinese imports account for only 2% of U.S.’s total steel imports, China exported a very high quantity of HRC to South Korea, Japan, Vietnam, Philippines, and Malaysia. These countries the processed the HRC imported from China and subsequently exported the processed steel products to U.S. The approximate quantity of these processed products exported to U.S. from above-mentioned countries is estimated to be around 10 MnT per annum.
• Therefore, the shift in U.S. import tariffs will have a huge impact on China’s direct exports to Asian countries.
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