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Section 232: A Month After Signing, Implementation and Exemptions

On Friday March 23rd, President Trump’s Section 232 tariffs on steel and aluminum took effect.  A day earlier, on March 22nd, the President announced five new temporary exemptions for Australia, Argentina, Brazil, South Korea and the EU member countries, set to expire on May 1st pending further negotiations.  Additionally, on March 18th, the Department of Commerce released details on the exclusion processes for US domestic steel and aluminum buyers.  Despite slowing toward the end of March, domestic prices continue their upward climb, hitting $859/ST for HR on April 4th, while HR futures have begun to decline, spurred by the recent exemption announcements.  On the international front, Europe has initiated a “safeguard" probe to examine the effect of US tariffs on the volume of cheap imports entering the EU market, while China on April 2nd implemented counter tariffs on $3 billion of US exports, including aluminum scrap and stainless steel pipe.

Trump’s Tariffs take effect and five new exemptions announced

President Trump’s tariffs—25% on steel and 10% on aluminum—took effect on Friday, March 23rd, with customs workers and staff at ports reportedly struggling to keep up with the newly added work volume.  Their load was lightened considerably the day before, however, as the President announced five new Section 232 exemptions for Australia, Argentina, Brazil, South Korea and the EU member countries.  The President announced that these exemptions, along with those for Canada and Mexico announced back in early March, would expire on May 1st unless the exempted countries were able to come to an alternative arrangement to combat global excess capacity and assuage US national security concerns.  It is assumed that both Canada’s and Mexico’s exemptions still depend at least in part on the outcome of NAFTA negotiations, which President Trump recently demanded be completed within the next two weeks.  Given the troubled progress of ongoing talks and the hesitance of Canada and Mexico, it remains to be seen whether an agreement will be arrived upon by this deadline and how this outcome will affect the President’s decision to preserve the 232 exemptions.  In addition to the existing exemptions, there are indications that other US allies sharing significant security relationships may soon follow.  Market sources report that Japan and Turkey could still agree to an exclusion deal with the US and that ultimately only 15% of steel imports may be hit with the 25% tariff. 

Major US steelmakers worry that with the new temporary exemptions, Trump has significantly reduced the effectiveness of the section 232 tariffs—at present, over 52% of the roughly 36 million metrics tons of steel imported into the US in 2017 came from countries that are now exempt from the tariffs.  It will be difficult for the US to reach Secretary Ross’s 80% domestic utilization target with so much of the import volume exempt unless President Trump decides to increase tariff levels—something he has not ruled out after the May 1st exemption deadline passes.  Trump’s recent moves seem to add validity to what many skeptics have long suspected—that the President views the section 232 tariffs as a bargaining chip he can use to achieve campaign promises such as securing a favorable NAFTA agreement, rather than as a meaningful strategy to fight steel and aluminum dumping and excess capacity globally.  With the status of the temporary exclusions still uncertain and many details of the tariffs still being ironed out, it is of course too early to come to any firm conclusions.

Despite the exemptions granted for Canada and Mexico in early March, domestic spot prices have soared over the last month, with HR prices reaching $859/ST—up 40% from the 2017 Q2 average.  Following the five new exemption announcements which came just before the tariffs went into effect on March 23rd, HR prices temporarily declined, falling for the first time since early December 2017, while US domestic HR futures dropped to $860/ST for the month of April—down $15 from the beginning of March.  With futures further out into Q2 and Q3 also posting significant declines W-o-W since the recent exemption announcement, it appears popular sentiment is that the temporary exemptions will remain after the May 1st negotiation deadline.   However, given that the details of the section 232 tariffs are up in the air and US domestic prices have resumed their upward climb, many domestic buyers may find it advantageous to continue using their foreign import sources. 

Process for Domestic Exclusions Released

On March 18th, the Department of Commerce released further details on the processes and timeline for US domestic steel and aluminum buyers seeking exclusion from the tariffs, although there remains a level of uncertainty concerning the exact methods for exclusions to be arbitrated.  The exclusion is available for “individuals or organizations operating in the United States that use steel products in business activities in the United States” if they are buying steel articles determined “not to be produced in the United States in a sufficient and reasonably available amount or of a satisfactory quality.”  The government is authorized to “provide such relief based upon specific national security considerations.”  To file for exclusion, parties must fill out a separate submission for steel and for aluminum through the Department of Commerce website, where Excel-based submission forms are available.  Once a party files for exclusion and submits the exact amount and specifications of steel they are seeking exclusion for, the application will be made public on the Department of Commerce website for 30 days during which any “individual or organization in the United States” may file an objection with supporting documentation to show that the steel being sought exclusion for can be produced domestically.  The Department of Commerce expects to return a decision on exclusions within 90 days of the original submission (60 days after the objection period closes) and will post the decision for the public to see on their website.  The prospect of publishing exclusion seekers’ proprietary material specification and volume details for public viewing and commentary make this process somewhat peculiar and has been met with suspicion and apprehension from some.  Nevertheless, some US companies remain undeterred, such as Pennsylvania-based Allegheny & Tsingshan Stainless Joint Venture, which filed for exclusion last week.

Global markets ResponD to U.S. Tariffs

In Europe, market sentiment has fallen slightly from January and February weighed down by trepidation over the US tariffs.  There are significant fears that European prices will be weakened by a glut of new cheap imports diverted towards the European market.  To combat this, the European Union took the first step toward protecting EU-based steel manufacturers, opening a "safeguard" probe into whether the US tariffs are diverting worldwide shipments to the EU market.  The inquiry covers twenty-six types of steel ranging from stainless hot-rolled and cold-rolled sheets to rebars and railway material.  It is expected to be concluded within nine months with provisional measures able to be adopted sooner, if necessary.

In China, the government has already authorized a quick response to US 232 tariffs. Chinese tariffs on roughly $3 billion of US exports went into effect on Monday, targeting a variety of goods from meat and fruit to aluminum scrap and stainless-steel pipe and tube.  In the Chinese domestic steel market, despite prices weakening in response to the news of US import tariffs, confidence remains relatively high as prices are expected to be supported by improvement in domestic demand.  Nevertheless, there is concern over the EU’s announcement of its own import probe and the China Iron & Steel Association (CISA) has urged the Chinese government to ensure that the protectionism seen overseas does not affect the Chinese domestic steel market.  As the trade war between China and the US escalates and Trump announces further developments on the 232 tariffs, additional retaliatory tariffs may be on the horizon.

Manufacturers’ Actions & Industry Implications

For steel and aluminum buyers, the implementation of section 232 tariffs and the uncertainty of the current situation makes it essential to understand and quantify the impact of material cost increases on their business.  Organizations are analyzing the effects of raw material fluctuations through the complete bill-of-material on a full product basis to evaluate product profitability.  A clear understanding of product profitability will set the baseline for an effective commercial strategy—including pricing and market-share objectives based on raw material market volatility.  Ultimately, most organizations will be forced to adjust pricing to customers and each industry has various pricing strategies—many B2B companies may have raw material recovery mechanisms in place with customers, others will be pushing increases onto consumers directly on everything from automobiles to canned soup.  In addition, production value chains and manufacturing footprints will need to be re-evaluated given the new cost baselines in each region.  Already, many manufacturers are considering alternative manufacturing and supply chain options and grappling with the unfortunate reality of downstream domestic job losses that may accompany these.