2018 – Will Political Risks Trump Steel Cycles?

Written by John Packard

The year 2017 proved a bit “odd” as the threat of political action against foreign steel worked against the domestic steel mills. Early in the year, newly crowned President Trump authorized the U.S. Department of Commerce, led by former steel magnate Wilbur Ross, to investigate if the steel industry is essential to the U.S. for reasons of national security, and thus should be shielded from unfairly traded foreign imports.

Although supported by the U.S. steel mills, the Section 232 investigation was not requested by the domestic producers who had already won victories utilizing antidumping and countervailing duty rulings on corrosion resistant, cold rolled, hot rolled and plate steels during calendar year 2016. Those rulings took monthly foreign steel imports, which had been as high as 4 million net tons, down to 2.4-2.6 million tons in the second half of 2016.

With the promise of an early determination on the Section 232 investigation that President Trump requested for June 2017, the industry prepared for the worst by increasing purchases of foreign steel. The number of tons imported rose from 2.6 million at the beginning of the year to well over 3 million net tons by the summer.

It was the widespread belief in the steel community that Secretary Ross would advise the president the steel industry is essential to the well-being of the country and would suggest special duties or quotas to control foreign steel tonnage sent into the United States.

World Trade Today reported, “In early June, Trump told a crowd in Cincinnati that the steel industry would be ‘very happy’ with the outcome of the investigation. ‘Wait till you see what I’m going to do for steel and your steel companies,’ he said. ‘We’ll be seeing that very soon. The steel folks are going to be very happy.’”

The June 2017 deadline has come and gone. The Commerce Department recommendation is now due by no later than Jan. 14, 2018 (which is the Sunday prior to a national holiday) and the administration has given no indication of what Secretary Ross will recommend, or even if the president will take any action at all.

As noted by World Trade Today, the Trade Expansion Act of 1962 calls for the Commerce Department to consult with the Defense Department on methodological and policy questions related to a 232 investigation. The Defense Department has reviewed drafts of the Commerce Department’s national security recommendations. Yet Defense Secretary James Mattis is reportedly against some of the proposed restrictions unless there are “significant carveouts” for U.S. allies.

So, the early “Gray Swan” event for 2018 will most likely be how (or if) the government defines steel as essential to national security. If the DOC and President Trump find steel to be critical, what will the president do regarding any quotas or sanctions? And what happens to the industry and specifically to foreign steel traders (and tonnage) should the response be a whimper rather than a bang?

Circumvention Ruling – What Does It Mean?

Late in 2017, the U.S. Department of Commerce ruled that hot rolled and cold rolled steels from China converted to cold rolled and corrosion resistant steels in Vietnam did not constitute “significant transformation.” Under past rules, when substrate was altered by rolling or coating, the conversion created a new product (hot rolled to cold rolled, cold rolled to coated) and thus changed the country of origin. U.S. steel mills argued that China was trying to avoid the antidumping and countervailing duties applied to their exports of hot rolled and cold rolled by shipping the steel to Vietnam for further rolling, thereby circumventing U.S. duties/deposits. The U.S. mills argued that the high cost of production was in the creation of the hot rolled substrate from which the other products emanate. The DOC agreed and have ordered the importer of record (the company responsible for clearing the steel through customs in the U.S.) to pay the Chinese duties/deposits of more than 200 percent on the original hot rolled or cold rolled substrate used by the Vietnamese mills. The duties/deposits will be applied to Vietnamese cold rolled and coated steels that arrived going back to November 2016. The duties/deposits only apply to the mills/traders that cannot prove they did not use Chinese substrate.

There is a bigger issue here that may impact more than just Vietnam. The “significant transformation” rules regarding conversion and country of origin are no longer valid, which means all conversion mills located outside of the United States must be prepared to prove the substrate they are using was not originally from a country whose steel is subject to antidumping or countervailing duties in the United States. U.S. buyers of foreign steel will need to be extra vigilant to make sure the origin of the substrate being used can be clearly and cleanly traced back to a producing mill that does not have dumping duties or deposits due from past U.S. trade cases.

During 2018, we may see more arguments by the domestic mills (or self-initiated by the DOC) against other countries that are buying substrate from AD/CVD-affected sources. One example could very well be South Korean OCTG and line pipe, which is being manufactured from either Korean or Chinese hot rolled—both of which are subject to U.S. duties/deposits from past trade cases.

President Trump’s Executive Orders on Deficits and Buy American

Early in the Trump administration, the president signed many memorandums and executive orders directing the DOC, as well as the U.S. Trade Representative and Homeland Security, to review trade-related issues that have been negatively affecting the steel industry and the country’s trade deficit. Here are a few that may ultimately impact the steel industry during calendar year 2018:

• World Trade Today reported that on March 31, 2017, President Trump issued an executive order calling for the Department of Homeland Security to review two reports on how to enhance the collection of antidumping and countervailing duties at the border. The order called for the reports to be submitted within 90 days, which ended on June 29. A DHS spokeswoman in July told Inside U.S. Trade the reports were under review by the agency and were expected to be submitted to the White House soon.

World Trade Today reported that President Trump also submitted another executive order on March 31, 2017, regarding trade deficits. The executive order and a subsequent Federal Register notice outlining the scope of the task directed Commerce Secretary Wilbur Ross and U.S. Trade Representative Robert Lighthizer to submit the “Omnibus Report on Significant Trade Deficits,” examining the causes of U.S. trade deficits on a country-by-country basis. The Commerce Department in June submitted the report to the White House. It has not been made public.

• On April 18, 2017, President Trump issued an executive order directing that a report be sent to the White House by all government agencies no later than Nov. 24, 2017, on “the monitoring of, enforcement of, implementation of, and compliance with Buy American laws within their agencies.” The report is under review by the White House.

• The April 18 order also directs the DOC and USTR to complete assessments of the effects that free trade deals and the World Trade Organization’s Government Procurement Agreement have on Buy American Laws, including their impacts on the implementation of domestic procurement preferences. The assessment is expected to cover the 1933 Buy American Act—which stipulates that products are compliant as long as they are “substantially transformed” in the U.S.—and 1982 Buy America Act provisions, which require transportation infrastructure projects to use iron and steel that is melted, poured and finished in the U.S.

• On Jan. 24, 2017, President Trump issued a memorandum regarding construction of U.S. pipelines. Based on reporting by World Trade Today, the memorandum called for new and retrofitted pipelines to use only materials and equipment produced in the U.S. The memo directed the Commerce secretary to develop a plan to require domestic sourcing of materials for pipeline construction. The Commerce Department said it would deliver a plan to the president by July 23. A Commerce Department spokesman said the report was submitted to the White House on time and is under review. Canada and the European Union separately submitted comments to Commerce in April arguing that “the imposition of domestic preference requirements on private companies would be unprecedented and would run afoul of WTO rules and trade agreements.”

Stronger Pricing Cycle Heading into 2018?

Foreign steel traders have once again responded to the due date of the Section 232 report from DOC to the president by shrinking the number of foreign tons coming into the United States. We saw tonnage drop in November, and the December trend is for imports to be around 2.3 million net tons.

Ferrous scrap prices have been moving higher over the past couple of months and are forecast to rise again in January 2018.

The domestic steel mills have kept pressure on spot pricing of flat rolled by announcing price increases. SMU expects another increase announcement to be made once scrap prices settle early in January.

For those of you purchasing coated steels (galvanized and Galvalume), the spot price of zinc on the LME ended 2017 at $1.5034 per pound. This is very close to the five-year high set in late October 2017. At the same time, inventories of zinc in LME warehouses have fallen from 1.2 million metric tons five years ago to 183,525 metric tons as of the last day of 2017.

The domestic mills are expected to become much more aggressive as the New Year begins in attempting to collect some of the already announced price increases and to ask for even higher prices should lead times extend and input costs continue to rise.

The SMU Price Momentum Indicator is pointing to higher prices for flat rolled products as we begin the New Year.

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