Section 232 Update: Exemptions Extended
After granting temporary exemptions to several US allies and trade partners back in March when the Section 232 tariffs on steel and aluminum were first rolled out, President Trump recently announced further extensions for all parties on April 30th, the day before the exemptions were set to expire. For South Korea, Brazil, Argentina and Australia, the exemptions will be permanent, with South Korea securing a long-term exemption in exchange for export quotas and Brazil, Argentina and Australia in the final stages of finalizing similar alternative agreements. For Canada, Mexico and the EU, Trump extended the deadline for reaching an agreement to June 1st as discussions continue. Amid the news of exemption extensions, US domestic HRC futures are showing steady declines through the end of 2018, down nearly $100/ST in Q4, although current spot prices continue to climb, reaching $872/ST this week. Global aluminum prices have risen another 3% today on uncertainty surrounding 232 tariffs and US sanctions against Rusal and Midwest Premium prices remain high at $0.21/lb.
Trump Announces permanent exemption for four allies and extends exemption deadline for others
On April 30th, President Trump announced that the temporary exemptions from Section 232 tariffs on steel and aluminum given to Mexico, Canada, the EU, South Korea, Brazil, Argentina and Australia would be extended, with the one exception being aluminum imports from South Korea. The steel exemptions, on the other hand, appear to be permanent for South Korea as the two countries reached an agreement in late March. South Korea accepted a quota of 2.68 million MT of steel volume to be excluded from the tariffs in exchange for improved market access for US automakers and limitations to Korean automotive imports, of which there are currently very few. Korea’s automotive concessions and quota, representing 70% of the annual average volume imported from South Korea from 2015 – 2017, were deemed by Trump a “satisfactory alternative means to address the threatened impairment to our national security posed by steel articles imports from South Korea”. The US is reliant on South Korea for significant volumes of bar, pipe and tube and this agreement will be welcome for steel buyers who have seen their supply options dwindle. Notably, the agreement only covered steel imports, leaving aluminum imports from South Korea subject to the 10% tariff.
For Brazil, Argentina and Australia the tariff exemptions also appear to be permanent. The President announced on April 30th that the US has reached preliminary agreements “in principle” with the three countries on imports of steel and aluminum such that it is “necessary and appropriate” to extend their exemptions with no expiration date while the agreements are finalized. A senior administrative official confirmed that the US was also seeking import quotas in these agreements similar to those established with South Korea. Over the past few days there have been some reports of conflict surrounding the US talks with Brazil but it remains to be seen if this will alter the status of the exemption.
In addition to the four long term exemptions, President Trump also announced on April 30th that he would be delaying the implementation of tariffs on Mexico, Canada and the EU until June 1st, a month after his initial May 1st deadline in order to allow for continuing discussions. For Mexico and Canada, their exemption presumably hinges on the outcome of NAFTA talks, which are reportedly making progress despite several outstanding issues that still require settlement. These talks have been accelerated as the three nations attempt to reach an agreement before Mexico’s presidential election in July, which could scuttle progress. As for the EU, the path to an agreement appears less clear as EU leaders have strongly denounced the tariffs and suggested a quota solution as unlawful under world trade rules and unwarranted. When the tariffs were first announced in March, European Commission President Jean-Claude Juncker threatened to put retaliatory tariffs on goods like blue jeans, bourbon, and Harley-Davidson motorcycles coming from the US. The EU has maintained this position and little progress seemed to come out of French President Emmanuel Macron and German Chancellor Angela Merkel’s visits to the White House last week, as they left with no concrete assurances or concessions.
As Spot Prices continue to trend upward, Futures signal a cooling of US Market amid exemption extensions
HRC prices in the US hit new highs as we enter the month of May, reaching $872/ST, despite the tariff deadline extensions. The futures market continues to show a retreat, as it has the last several weeks, however the US spot market continues to heat up and May futures match current spot prices. June futures are lower by $20-30/ST with steady declines throughout 2018 and December settlements in the range of $760/ST. Scrap futures also predict a fall of nearly $30/ST reaching into Q4 2018 from today’s spot prices of $344/ST, reflecting the confidence in the market that current exemptions will remain in place. However, for now US mills are enjoying significant jumps in profitability with the surging market with EAF mini-mills doing particularly well as scrap prices have lagged behind HRC. The HRC/Scrap gap currently sits at around $530/ST, having grown 56% since the beginning of 2018.
In the EU, HRC prices have remained steady sitting at around €570/MT, but this could change if the safeguard investigation which was launched in March finds cause to implement duties of their own on foreign imports. Countries with significant exports to Europe such as China and India have spoken out against such an outcome, however it seems the European Commission’s fears about diverted cheap imports are not unfounded with EU imports reportedly up around 10% in Q1 as compared to the same period last year.
Global LME aluminum prices are currently sitting at $1.07/lb, up some 3% from earlier this week as trade uncertainties loom. Prices are up 7% from early January with 3 month futures on par with current spot pricing. The Midwest premium has fallen from its peak of $0.22-23/lb in April to $0.21/lb, but this is still up 119% from the beginning of 2018. June futures show a decline to $0.19/lb and sit just below $0.18/lb for Q4 2018. Global aluminum prices have surged since 232 tariffs were implemented and the US announced sanctions against Russian mill Rusal, which is the world’s second largest aluminum producer, on April 6th. Earlier this week, the US announced that it would extend its deadline before the sanctions on Rusal come into effect and potentially even offer sanctions relief if Oleg Deripaska, Rusal’s owner and the target of US sanctions, divests his holdings. With this news, prices calmed over the past few days until recent 232 tariff uncertainty led to another rally today.
US intending to enact Further Duties outside of 232 tariffs on certain products
Aside from the ongoing focus on blanket 232 tariffs, the US International Trade Commission has been actively investigating specific trade concerns surrounding a range of steel products, leading to more pointed actions by the Dept. of Commerce. In light of the USITC’s findings, since the beginning of April, the Department of Commerce has announced a series of antidumping and countervailing duties on a variety of products ranging from carbon and certain alloy steel wire rods, stainless steel flanges and steel wheels coming from China, Vietnam and other countries, which can be found on the DOC’s “Trade and Investment” section of their website.
In addition to metals-specific tariffs, there are broader tariffs on a range of Chinese goods looming on the horizon if the US and China cannot make progress in talks taking place this week between the Trump Administration’s senior economic officials and Beijing. The talks come after a series of protectionist threats were hurled across the Pacific last month. Trump began in early April by targeting $50B of Chinese exports intended to compensate the US economy for losses due to Chinese Intellectual Property theft. China quickly responded with its own list of US goods it would subject to tariffs comprising roughly the same value. Trump then upped the ante with an additional $100B of Chinese exports and China has vowed to fight these measures “at any cost.” Any such wide-ranging protectionism of this kind would send ripple effects throughout the economy causing hardship for many US industries manufacturing and beyond.
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