Section 232 Update
On Thursday, March 8th President Trump signed the 232 tariffs into law. As expected, they were 25% on steel and 10% on aluminum. Trump also included temporary exemptions for Canada and Mexico and a clause allowing US partners to discuss and negotiate other ways around the tariffs. The North America exemptions and flexibility built into the order will mitigate the effects of the tariffs slightly—US HR futures fell $13 to $875/ST in April, still ~$100/ST above current spot pricing which continues to rise—however, the uncertainty of the exemptions which depend on the outcome of NAFTA negotiations means little may change in the long run. Significant cost increases and profitability loss will hit raw material-consuming manufacturing industries in the USA as industries re-evaluate their value chains and footprint given increased production costs in the USA.
Trump Signs Final Decision on Section 232
President Trump confirmed that he would not back down on imposing steep import tariffs—25% on steel and 10% on aluminum—despite criticism from key members of the GOP, including House Speaker Paul Ryan and Senate majority leader Mitch McConnell, since its unveiling a week ago. With the signing of his new executive order, those tariffs are set to go into effect on March 23rd. The President did, however, deviate from his earlier promises that there would be no exemptions, opting instead to include a provision for the exclusion of Canada and Mexico to remain in effect on the condition of their cooperation with the ongoing NAFTA negotiations. The order does not specify how appeals for exclusions for US parties will be judged, instead advising that “Within 10 days after the date of this proclamation, the Secretary shall issue procedures for the requests for exclusion described in Clause 3 of this proclamation.” The order also includes a special provision open to any country that “shares a security relationship” with the US. The order states: “Should…any such country arrive at a satisfactory alternative means to address the threat to the national security such that I determine that imports from that country no longer threaten to impair the national security, I may remove or modify the restriction on…imports from that country.” Thus, although it remains unclear how the adjustment process will work exactly, the tariffs are intended to be flexible and subject to adjustment and the provision opens the door for the administration to ease tensions with key allies should a trade war or other such threat arise. Nevertheless, EU leaders reaffirmed their intention to impose retaliatory tariffs on US exports should Trump follow through with his plan, leading many to believe that the inclusion of this provision will change little in the long run.
Key Takeaways for Buyers: Mitigate Impact & Manage Risk
While the bulk of Trump’s decision remains the same, the exclusion of Canada and Mexico opens a critical opportunity for domestic buyers to continue to trade within the North American interconnected value chain. The presence of these alternative sources of production also serves to release some of the supply and demand pressure that the tariffs will generate in the US domestic market, and lead to slightly less drastic lead time elongation and price increases. Steel futures prices for April have dropped slightly ~$13/ST in light of the exemptions, however spot pricing continues to rise, increasing $20/ST week over week. Buyers can expect 2018 steel prices to be significantly higher than 2017 levels. In the short term, Canadian and Mexican mill prices will also rise to capture the increased US demand created by the tariffs, although likely less than their US counterparts. Market prices have begun to rise slightly in Europe as mills anticipate further retaliation/protectionism and attempt to capitalize on US increases to buoy their own price hikes. Steel pricing dynamics are regional, but heavily influenced by global markets and EU mills will use this to their advantage—although, further protectionism will reduce the global influence. Now that the tariffs have been signed into law, US manufacturers and buyers will begin assessing and implementing mitigation strategies to combat the cost inflation as well as dramatic impact to gross margins. OEMs and fabricators will turn down investment in the US due to higher costs of production and potentially re-evaluate value chains and footprint to move production overseas, as Electrolux’s recent announcement about delaying a $250M investment in the USA demonstrates. The growth of US mill jobs is likely to be outweighed by downstream job loss as each OEM production job lost typically equates to 10-25 upstream jobs lost at Tier 1s and other services that support them.