Trade Tensions, Tariffs and the U.S. Steel Industry

By October 10, 2022November 1st, 2022Articles

Five Questions with Terry Ryan

Managing Director, Carl Marks Advisors
Q:
What are the biggest challenges the steel industry is currently facing?
A:

The leading two I would cite are decarbonization and fair trade. Both of which impact global pricing, investment and capacity utilization which is critical for any mill. We are coming out of a period of significant price increases, which are now levelling off.

The industry is seeing significant profitability, but volumes are down across the board in the U.S., which is something to monitor as we move forward.

Additionally, China is a big influence on world markets, which trickles into the U.S. China has the potential to significantly amp up steel production and provide it at a cheaper price than U.S. producers, explaining trade tensions, and why tariffs have played such a key role in strengthening domestic steel producers. Beyond this, global steel producers are working diligently on developing technologies and setting standards for decarbonization of their melt and mill practices. This will be a critical element of investment and profitability as they try become more “green” and competitive in this space relative to global competitors.

Q:
Can you explain how tariffs have impacted the U.S. steel industry?
A:

Trade tariffs Section 232 & Section 301 both play separate but major roles. Section 232 encourages companies to utilize domestic manufacturing helping to protect U.S. technology and create jobs. It’s utilized to protect U.S. assets and technology that has a higher level of risk for national security. Section 301 is more about fair trade and less about national security.

Under either policy, however, for companies who outsource material internationally, tariffs have had negative effects. They correlate to higher costs, which in part can drive inflationary pressures.

Under the previous presidential administration there was a large uptick in the number of tariffs being applied to steel and metal-derivative goods. During the current administration, we haven’t seen a complete reversal of tariffs many were initially expecting, especially where China is concerned. So tariff policy does not necessarily change when administrations change.

Q:
The automotive industry is a major user of steel and has been struggling recently, where do you think the auto industry is now and how much of the turbulence it has faced relates to metals costs?
A:

The struggles U.S. auto manufacturers are facing have largely to do with semiconductor supply chain challenges, not steel availability, or costs.

I cannot imagine the semiconductor crisis will continue for much longer than 6-12 months, and steps have already been taken to encourage greater domestic production of chips and semiconductors.

While the domestic investment in production will take years to complete, turning the corner short term will hinge on both optimizing existing supply chains and resetting delivery expectations. This will in effect “lower the bar” on the delivery issues creating more stability in supply chains on a short term basis.

Q:
How have labor shortages impacted the steel industry?
A:

Labor shortages in the steel industry are nothing new, and though they have been more severe in recent years, they haven’t come about purely because of the pandemic.

Steel producers and manufacturers of steel-derivative products have always faced and continue to confront challenges in identifying and maintaining a pool of skilled labor.

The machining and welding trades are a prime example. Smaller producers especially have struggled to train and develop workforces in an increasingly competitive and technical environment. This combined with the continuing elevated cost of health care makes for a challenging labor market for any industrial business.

Q:
What is the outlook for the steel industry?
A:

For domestic producers, who have been thriving, the key will be:

  1. realizing the benefits of the investments in the sector that have been taking place over the past year or two, especially in areas such as decarbonization and “green steel” technologies,
  2. optimizing the addition and integration of acquired product portfolios like coated products, tubing and more steel-derivative products and
  3. a continuing healthy construction end market. This will be tempered by current inflationary pressures which could be a headwind in key end markets as the Fed tries to bring down inflation.

If the spending from the $1 Trillion infrastructure bill continues, this should provide a solid volume backdrop for mills ensuring that the industry doesn’t repeat the same cycles of the past which have seen significant capacity coming out of the market when there are volume declines and lower utilization rates. For manufacturers using steel and other metals who are looking for access to cheaper materials—especially in an inflationary environment—there will continue to be pushback against tariffs, but it’s unlikely we will see any major shift in policy regardless of the U.S. elections outcomes.

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