Section 232 Update: EU, MX, CA Exemptions Ending
With the June 1st extension deadline looming, on Thursday, May 31st President Trump announced that he would be implementing the Section 232 steel and aluminum tariffs on the EU, Canada, and Mexico, as the three trade partners were unable to reach a satisfactory alternative agreement with the US. Brazil, Australia, and Argentina appear to have followed South Korea’s path and received permanent exemption status in exchange for quota-based trade agreements. Trump’s decision has heightened fears of an all-out trade war with three of the US’s biggest allies and trade partners and has sent domestic spot prices and futures for steel and aluminum even higher in an already overheated market. For domestic steel and aluminum buyers, these new developments again demand reevaluation of value chains and assessment of risk to protect margins and mitigate hits to profitability.
Trump Announces End to Tariff Exemptions for EU, Mexico & Canada
Yesterday, President Trump announced that he would be ending the temporary exemptions from Section 232 tariffs for the EU, Mexico & Canada, making the 25% tariffs on steel and 10% on aluminum imports effective at midnight on Thursday. Trump initially enacted these blanket duties on March 23rd, 2018, however he gave temporary exemptions to a select group of US allies including the EU, Mexico, Canada, South Korea, Brazil, Argentina and Australia. The expiry for these temporary exemptions was set for May 1st and later pushed to June 1st, by which date the seven parties were required to have negotiated alternative trade arrangements with the US in exchange for securing permanent exemption status. While South Korea was able to reach a satisfactory agreement for steel (but not aluminum), which included export quotas / volume limits, and Argentina, Brazil and Australia also appear to have reached similar long-term tariff exemption agreements for both metals, Europe, Mexico, and Canada have been unable to do so. Despite intense ongoing talks, Mexico and Canada have been unable to reach a new NAFTA agreement with the United States, which President Trump has made a cornerstone of his agenda while in office, and thus he chose to end their exemptions. Since the announcement of the tariffs in March, the EU has remained resistant to any suggestion of quotas or other concessions in exchange for permanent exemption status— EU leaders continue to label these as “unjustified” and against WTO rules— which led Trump to end their exemptions as well.
While details are still emerging, all three parties have expressed outrage and concern, each announcing significant retaliatory tariffs on billions of dollars of US goods ranging from steel and aluminum to food and agricultural products. Canada’s Prime Minister, Justin Trudeau, announced plans for counter tariffs on $12.8 B of US goods from steel and aluminum to whiskey and other products. Mexico also announced “equivalent” measures on agricultural products, industrial products and steel from the US. The European Commission is still formulating a response with discussions ongoing between the member countries, but preliminary plans are targeting $3.4 B of US exports, which could come into effect as soon as June 20. While US Secretary of Commerce Wilbur Ross has expressed continued willingness to reach alternative agreements with these three parties, the outlook for any deal has become significantly bleaker given Trump’s imposition of the tariffs, which all three have labeled US “bullying.” Critics point out that Trump’s move has put the US on the precipice of a trade war with its closest allies just as the US squares off across the Pacific against China. Indeed, Trump has warned that he may respond to retaliatory tariffs with further levies on products such as European cars and beyond, indicating that the current metals tariffs could be just the beginning.
Spot Prices rally again and Futures spike as exemption extensions end for Major US Trade partners
With Canada, Mexico and the EU making up roughly 40% of the US’s import volume in 2017, Trump’s recent action has sent steel spot prices, which had plateaued as of late, back to all-time highs and caused futures to skyrocket. Despite cooling slightly last week to $876/ST, US domestic HRC prices rose to $886/ST this week in anticipation of Trump’s announcement. CME HR futures shot up over 5% from around $880/ST to $925/ST for June and July, and are not expected to fall below the level of today’s spot prices until October. Some sources even report futures asking prices well above those numbers over the next three months.
LME aluminum is currently sitting at $1.04/lb, up 3% from levels seen in the middle of the month, but still 4% below the peak of $1.08 seen in early May. In light of Trump’s recent announcement, however, futures were up 1% already on Thursday (May 31) and continued to rise on Friday morning. Future price developments will also depend on the outcome of the US sanctions against Russian aluminum producer Rusal. These sanctions initially caused significant price surges back in April when they were first announced, however recently Washington pushed the cut-off-date for trading in the company’s equity and debt back two months to August 5th to give the company more time to satisfy US demands and sever ties with Russian Oligarch Oleg Deripaska.
Like LME Aluminum, the Midwest Premium also rose on news of Trump’s tariff announcement. On Thursday, June futures rose nearly 5% from $0.21/lb to almost $0.22/lb, and July futures, though slightly lower, were also up nearly 3%. There is little relief in sight for aluminum buyers with futures remaining elevated through the end of 2018, hovering around $0.20/lb.
US steel buyers are now faced with even more challenges and must take steps to mitigate the impact if they have not already done so
With Trump’s recent announcements and the surging spot & futures markets, American steel & aluminum buyers must again reevaluate their value chain options, weigh the threat to their margins and consider new risk mitigation tools. Based on increasing commodity volatility, many buyers have implemented risk management tools to understand cost and— more importantly— product margin impact throughout the entire BOM. These tools allow buyers to react faster and smarter, and to develop strategies to reduce volatility in their earnings. Commodity markets will continue to see volatility in the future whether related to changes in these Section 232 tariffs or new market dynamics. With value chains in Canada and Mexico no longer free from levies, US metals consumers must consider moving their supply bases and/or manufacturing to mitigate erosion of product margins.
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