In mid-March, Canada’s Ambassador to the United States stated that he believes the United States steel tariffs may end soon. His speculation generated considerable media attention.(more…)
Overall global steel output is headed in a positive direction, despite recent controversy surrounding steel tariffs imposed by the Trump Administration. Over the last year, raw-steel production has steadily increased. This is after nearly two years of below-average demand. The World Steel Association predicts that steel demand for manufacturing and construction purposes will continue to increase throughout the rest of 2018 and 2019. This often correlates with overall global economic prosperity. Typically, positive economic performance leads to innovation and new construction, hence the rising steel demand.
Data suggests that May 2018 saw the largest jump of the year. In that month, global output increased by 6.6% compared to May of 2017. From April to May alone, global steel production jumped by 4.7 percent. While China and the European Union are responsible for the largest portion of these jumps, other countries are sure to see significant boosts as well.
India: A Steel Behemoth
Just recently, Anglo-Australian mining company BHP Billiton announced that it predicts Indian steel demand will double by 2025. Allegedly, the government’s goal is to produce 300 million tonnes of steel by 2030. If current production were to truly double by 2025, that means it would reach 170 metric tonnes.
Some economists are suggesting that India’s 2030 goal may be a bit of a reach. However, they still say it’s no doubt that the construction and infrastructural industries have a demand.
The recent trade war that has been spurred on by the Trump Administration’s tariffs has global economies scrambling for new strategies and steel consumers. There has been an inevitable period of rockiness in light of these recent events. Nonetheless, Huw McKay, BHP Billiton Vice President of Analysis and Economics, says there is enough global steel demand to absorb the newly produced steel.
EU Responds to Steel Tariffs
Since the U.S. has imposed levies on imported steel and aluminum, the EU must prepare for a steel/aluminum import surge into the bloc from other countries. Consequently, they are searching for solutions to curb some of these imports. On Thursday, the EU voted to back measures preventing an overwhelming influx of steel and aluminum. As a result, they have put a quota in place. They will still welcome steel imports, with some exceptions. To prevent a flood of steel imports into the EU market, the EU will place tariffs on imports exceeding the determined quota.
Excessive steel imports into the EU market could damage the EU steel industry’s own prosperity. The EU has also imposed its own levies on numerous U.S. imports, including jeans, bourbon, and motor bikes. Canada is also imposing “retaliatory tariffs” in response to the new U.S. policy.
While the impacts of the U.S. steel tariffs on the domestic market are still being assessed, certain industries (such as the automotive industry) will likely be impacted. In some steel-oriented towns across the country, the tariffs have brought relief. Many view it as a way to boost the American steel industry and encourage domestic steel production. As time continues on, consumers and steel experts are hopeful that growth in the steel industry will too.
President Donald Trump is planning to institute broad tariffs on steel and aluminum imports. These import taxes could result in lower profits for all companies that use these metals in their manufacturing processes, leading to higher prices for consumers, or a combination thereof. While the President’s plan calls for a 25 percent tariff on steel and a 10 percent tariff on aluminum, with no exemptions for any country, analysts say Trump’s proposal is sparse on details.
The Trump plan is designed to increase profits for U.S. metal manufacturers. However, analysts fear this could cause U.S. consumers of steel and aluminum to lose money, as U.S. metal makers would have increased pricing power with imported metals becoming more expensive. Additionally, aluminum costs are almost guaranteed to rise as virtually all of that metal is imported.
Scott Wine, CEO of Polaris Industries Inc., a manufacturer of snowmobiles and ATVs, says his company spends over $300 million per year on steel and aluminum. Wine says the tariffs would raise his company’s costs an estimated one percent, which he feels is manageable. However, Wine says Polaris would have to find a way to deal with the possible price increases from their domestic metal suppliers.
U.S. construction companies and automakers could be among the most impacted by the tariffs. In 2017, the U.S. construction industry accounted for approximately 40 percent of U.S. metal consumption and the auto sector accounted for just over 25 percent. However, U.S. Commerce Secretary Wilbur Ross said the effect of the tariffs would be trivial, pointing out that the one ton of steel used to make an average vehicle would have a minute impact on overall vehicle costs.
Sales or Profits?
Based on research conducted by consulting firm Ducker Worldwide, the typical American-made vehicle weighs roughly 1.9 tons, or 3,835 pounds. This breaks down to 54 percent steel and 11 percent aluminum. However, producing parts leads to waste, which raises costs further.
Overall, Ducker estimates U.S. carmakers consume 2,925 pounds of steel and 526 pounds of aluminum to build an average car. If these numbers bear out, automakers will need to offset the higher cost by raising prices, which could negatively impact sales, or accepting a lower profit margin. However, Joseph Amaturo, an analyst with Buckingham Research Group, states the Trump Administration’s new tariffs could add $300 per vehicle, which works out to roughly one percent, the same numbers cited by Wine and Secretary Ross.
The Broad Market
The new tariffs could affect everything produced in the U.S. that contains any steel or aluminum, or a percentage thereof. Many products contain metal alloys, which contain a percentage of steel and/or aluminum. With alloys being more expensive to manufacture in the first place, tariffs could have a substantial impact on everything from tractors to tuna fish cans.
JP Morgan analysts say the proposed tariffs could put a dent in both Caterpillar and John Deere tractor sales by as much as nine percent. Edward Jones analysts say the new import taxes would affect food prices as well. Aluminum tariffs would have the potential to raise costs about seven percent for breweries, especially those whose largest market is the U.S.
According to stock market analysts, tariffs are unlikely to significantly impact Corporate America. Keith Parker, an analyst for United Bank of Scotland, with offices throughout the U.S., says the impact on total corporate earnings is driven by the overall economy. This is confirmed by large companies failing to adjust their earnings estimates following the President’s announcement. Scott Wren, equity strategist at Wells Fargo, says there will be repercussion from the tariffs, but it is not going to be the end-of-the-world gloom and doom some are predicting.
President Donald Trump’s tariffs continue to be a topic of interest, especially for businesses that rely on steel and aluminum imports. These industries saw declines for decades, and Trump’s idea is to place a 25 percent tariff on imported steel and 10 percent tariff on imported aluminum to level the playing field for domestic producers. Naturally, these new trade restrictions don’t impact the steel or aluminum sectors alone.
Disadvantages for Automotive Industry
The automobile industry has long been a consumer of steel and aluminum, with a shift toward aluminum in recent years because of its weight advantage. The increased costs on steel and aluminum imports as a result of this policy change will result in adverse effects for American automobile manufacturers – and their consumers. To put it into perspective, steel accounts for about 60% of the weight of an average automobile, confirming the industry’s heavy reliance on it.
Industry representatives from the American International Automobile Dealers Association responded quickly to express their unease with Trump’s idea. They argue that tariffs could have unintended consequences, especially in the form of higher raw material prices, which would adversely impact the auto sector. Furthermore, it could devastate the availability of jobs in the industry, which employs more than 7 million Americans.
It’s unsurprising that the automobile companies are not happy about tariffs since they introduce a new level of uncertainty. They will make forecasting sales and production costs more difficult, which may have an adverse impact on the bottom line.
Even worse, they argue, one could consider the tariff to be a “tax” that consumers will end up paying. That makes their vehicles more expensive and the domestic auto industry less competitive.
The Controversy Behind Tariffs
Tariffs are always a controversial subject and this time is no different. President Trump is not afraid to shake things up, and there’s little question that his trade proposals are causing a lot of debate, with some pundits claiming the industry faces a job loss of 45,000 by 2019. They also argue that any attempt to protect 145,000 steelworkers at the expense of 6.5 million workers in other industries is dangerous to the economy.
Perhaps even more interesting, President Trump also proposed 20% tariffs on foreign-produced vehicles. Whether this proposal will assuage industry concerns about the steel and aluminum tariffs is as yet unknown. However, it appears the President is serious about his commitment to domestic job production, especially among manufacturers.
Uncertainty is Still High
It’s fair to say that so far none of these matters are close to settling. Several foreign countries have temporary exemptions from the tariffs which they are attempting to make permanent. Essential trade agreements, such as NAFTA, are still in negotiations.
It’s also worth mentioning that the notions of “fair trade” and “free trade” are also generating fierce debate. The open market competition that is in place offers few protections for domestic manufacturing. Traditionally, leadership tends to stay away from entering into this arena because it could become a case of the government choosing sides. Instead of natural market forces determining an eventual winner, regulations impose the will of the government into the equation.
It’s still too early to know how everything will play out for all interested parties, especially with the new proposed tariffs on imported vehicles. Whether those proposals will counter the potentially adverse impact of the steel and aluminum tariffs will require additional research. It’s also possible that President Trump may alter his stance on some or all of his current trade stance. In the meantime, automobile industry executives will have to deal with changes in the sector.