Metals Industry Watches as Tariff Deadline Approaches

With less than 10 days remaining before the tariffs on imported steel and aluminum become effective, much is being said from both tariff proponents and those opposed to their implementation. Here is a look at the impact that tariffs could have on both the producers and consumers of steel and aluminum.

What the tariffs say

The tariffs on steel and aluminum were signed by President Trump on March 8, 2018, and take effect at 12:01 AM Eastern time on March 23, 2018. For steel, a 25% tariff is added on imports, and for aluminum, a 10% tariff applies. Imports from counties covered by NAFTA (Canada and Mexico), are exempt from tariff at this time.

The impact for domestic producers

On the pro-tariff side, the U.S. Steel Industry has been at a competitive disadvantage in the market for steel products by production from foreign steel suppliers, most significantly China. By 2017 estimates, steel mills in China generated 50% of the world’s raw steel output. In fact, Chinese steel producers occupy 5 of the top 10 positions measured in terms of annual output and represent 10 of the top 25 steel companies worldwide, based on the reported volume of output from 2016. With the bulk of these operations managed by the state, Chinese steel companies can flood the market with steel at lower prices, while competitive products remain more expensive, hence allowing China to retain market share. By implementing tariffs, the administration is hoping to shore-up domestic steel producers and protect the jobs of U.S steelworkers. According to data from the Bureau of Labor Statistics (BLS) and the United States Geological Survey (USGS), employment in the U.S. Iron and Steel Industry has declined by approximately 8.3% since 2013, to 147,000 in 2017. During this same period, steel imports from overseas steel mills have grown by around 23%, while net exports of domestic steel fell by 4%.

With regard to aluminum, domestic production has also fallen year-over-year, down by 64% in 2017 versus 2013. At the same time, imports of aluminum for consumption have risen by 51%, while exports have dropped 14.5%. Domestic employment of production in the aluminum and alumina industry has declined by around 7% over the period from 2013 – 2017. It is reported that as of October of 2017, domestic smelters were operating at about 37% of capacity.

The impact to metals consumers

While the tariffs will help bolster employment at domestic metals companies by an estimated 26,000 -33,500 jobs, according to estimates made by the Trade Partnership Worldwide, there is also cause for concern. Higher prices for metals products and materials could impact employment in industries that consume metal for processing and produce finished goods or components for use in industrial machinery or consumer products, such as automobiles and appliances. These higher material costs would ultimately be passed on in the form of increased prices to customers and consumers, leading to the potential for reduced demand as prices rise. The current robust U.S. economy has also led to a series of recent interest rate hikes, as the Federal Reserve Bank seeks to tap the brakes on the economy to control inflation risk driven by a tightening labor market. The Federal Open Market Committee raised the federal funds rate by 25 basis points to 1.5 % back in December 2017 and has signaled that they may continue to raise interest rates over the next two years. Coupling higher steel and aluminum prices with rising interest rates could have the effect of making large ticket items like automobiles, which are often financed as opposed to purchased outright, become more expensive to purchase. Reduced demand could therefore potentially impact employment in industries whose products are dependent on steel and aluminum prices. According to the Bureau of Labor Statistics, there are close to 30,000 firms in the U.S. that consume steel, and they collectively employ more than 900,000 workers. While tariffs could directly help aluminum and steel workers by increasing demand for domestic metals, they could indirectly cost jobs in other industries dependent on metals as part of their supply chain. The Trade Partnership Worldwide research has estimated that impact to be in the range of 179,000 – 495,000 jobs across both industries that consume steel, as well as in the broader economy.

Another possible risk of tariffs on manufacturers of finished metal products is the potential for their customers to seek out cheaper imported equivalents. Offshore suppliers, while facing tariffs on the importing of steel and aluminum to the U.S., face no penalties for exporting finished goods made from these metals. So a domestic metal stamping company using higher-priced steel to produce automotive components, for instance, may find their customers migrating to overseas stamping operations that can buy tariff-free steel and then fabricate parts for import to the U.S. that face no additional trade restrictions. So while steel is restricted, brake rotors made from steel are not.

What to watch

The months ahead will be important to monitor for any business that either produces or consumes steel and aluminum. Business leaders and procurement professionals who source metals should monitor supply chain prices and availability, and assess domestic sources for changes in output as tariffs impact imported metals. Lining up domestic sources now for needed alloys in the supply chain will help reduce risks of lead time issues or shortages downstream.

As the year progresses, attention should also be paid to other signs in the industry and general economy such as:

Infrastructure — How will the 2018 legislative agenda progress as the year unfolds, and how will the mid-term elections alter that agenda with particular focus on infrastructure investments, which will potentially consume large amounts of steel?
Construction — Will strong growth in the construction industry continue, as this is a key market for metals use. The Bureau of Labor Statistics employment report showed that industry employment grew in February by 61,000 jobs, and construction has added 185,000 jobs over the past 4 months.
Capital Investment — How will capital investment be impacted by a rising interest rate environment, which increases the cost of capital for factory and plant renovations and expansions? Manufacturing employment has been rebounding over the last several years, adding 31,000 jobs last month and 224,000 jobs over the past year.
Durable goods — What will the trend be for durable goods orders, such as appliances and automobiles, which make use of metals whose price changes could be reflected in higher costs to consumers?

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Employment in the U.S. Iron and Steel Industry

Employment in the U.S. Aluminum Industry

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