by MAURA KELLER
President Donald Trump recently imposed sweeping tariffs on steel and aluminum that could lower profits for manufacturers of everything from pickup trucks to canned soup, or result in higher prices for consumers and have an impact on recycling companies.
About one-third of the 100 million tons of steel used each year by American business is imported, while imports account for more than 90 percent of the 5.5 million tons of aluminum used by U.S. companies.
The tariffs were imposed at a time when the metal industry was improving. According to George T. Haley, Professor of Marketing & International Business, University of New Haven, the steel and aluminum industries have had improved performance in recent months.
“U.S. steel exports slumped in December but turned back upward in January,” Haley said. “Steel’s futures market indicated the upturn would continue. Inventory trends were favorable as the inventory to shipment levels were decreasing. Additionally, order lead times were increasing.”
Aluminum suffered a significant downturn in 2017 from 2016’s performance, but an upward trend that began in September 2017 was continued in the first months of 2018.
“That said, based on the expectations of the tariffs going into effect, U.S. Steel is reopening one of its two blast furnaces at its Granite City Plant and plans for major investments have been announced in the aluminum industry. Century Aluminum has also announced plans for a $100 million investment,” Haley said. On the negative side, Haley explained that steel buyers have reacted negatively to the announcement citing the uncertainty that the president’s announcement introduced to the market.
“Generally speaking, when the steel buyers’ sentiment index turns downward, steel purchases follow the sentiments downward,” Haley said. Retaliation toward the tariffs would mean higher prices on aluminum and steel in the U.S. as well as the higher prices on all products using imported aluminum and steel. The tariffs also affect all steel and aluminum imports, from all countries except Mexico and Canada.
As Jeff French, Grant Thornton national managing partner further explained, “The proposed 25 percent tariff on steel imports and 10 percent tariff on aluminum imports would hit manufacturing especially hard and impact a wide variety of industries. U.S. automakers, already struggling with higher commodity costs and declining sales, would likely be significantly impacted. The sector accounted for 26 percent of U.S. steel demand in 2017.”
According to French, Ford (the number two U.S. automaker) reported in January that higher steel and aluminum costs would hurt 2018 profits, and blamed a poor fourth-quarter performance, in part, on higher commodity costs.
“Implementation of new tariffs could mean the choice between lower margins and lower sales,” French said.
While the proposed tariffs would benefit U.S. based raw steel and aluminum producers, French suggested that, “The manufacturers who consume these inputs, and who far outnumber the small group of companies that will benefit, will see their costs rise.”
While significantly in-creased prices of domestic steel and aluminum will benefit steel producers, one major concern is that the move could trigger a trade war that could negatively impact NAFTA negotiations. However, French said, the primary driver of the tariff measure is to raise steel and aluminum production capacity from 74 percent and 71 percent respectively, to 80 percent. The Trump administration is hoping raising domestic materials prices will allow producers to gain a bigger share of the domestic demand pie.
“These tariffs would take place in a market where steel and aluminum prices are already rising,” Grant Thornton’s French said. “It’s too early to tell the impact these tariffs will have on domestic production and on potential trade retaliation, but recent history does not show a favorable trend from such tariffs. Companies should look at supply chain options to mitigate the margin impact from these tariffs.”
The Recycling Industry’s Reaction
According to Albert Cozzi, director at Cozzi Recycling, “Every one of our customers hate the tariffs. It will raise costs that they will either have to pass on to their customers or absorb themselves. They are concerned that increased prices will make them uncompetitive compared to foreign competition.”
As Cozzi explained, in the case of steel, domestic prices are already 20 percent above world prices and the domestic steel industry is making record profits and their stock prices are trading at several times what they were just a couple of years ago.
“The domestic steel industry will be helped by the tariffs but metal consumers and the American consuming public will be hurt,” Cozzi said. “Yes, employment in the domestic steel industry is a fraction of what it was in 1950. But that is a result of technological change. It takes a fraction of hours today to make a ton of steel that it used to. American steel companies have not lost employees because of foreign competitors, they have lost them to their domestic competitors through innovation.”
As far as the recycling business is concerned, Cozzi said the jury is still out as to how it will affect the industry. “If the volume of scrap generated domestically goes down because fabricating production goes down, it will hurt our business,” Cozzi said. “We are volume driven.”
Also, as far as prices are concerned, Cozzi said it is hard to tell how they will be affected. “Scrap is a world commodity so the same amount of it will be consumed with or without the tariffs,” Cozzi said. “The question is where it will be consumed. There could be dislocations. Also, as domestic steel production goes up, the demand for scrap could go up locally.”
Doreen Edelman, co-leader of Baker Donelson’s Global Business Team in Washington, D.C. has over 25 years of experience in import and export compliance, foreign investment and global expansion, with clients including Tier 1 manufacturers and automotive suppliers that would be deeply impacted by recent U.S. trade action proposals.
Edelman says that the impact of the tariffs on recyclers will depend on where the recycler gets the materials. “There are many sides of this problem,” Edelman said. “For example, will there be more work for recyclers because more U.S. metal will be recycled and reused? It will also depend if the Canadian and Mexican exporters get an exemption under NAFTA. Additionally, Congress is pushing back to have president Trump tailor his decision on the duties, and this will for sure affect the industry. We don’t have all the information yet and the decisions are still in play.”
Metals Market Status and Effect On Pricing
As the metals market continues to improve, prices are expected to go up. As Haley explained, U.S. steel and metals prices are generally competitive, but the U.S. metals industries will not be able to satisfy demand on their own, so prices will go up due to both scarcity and the costs associated with having to pay tariffs.
What’s more, the current market is pretty good for recycling companies. Scrap metal exports are rising and as the U.S. metals industry has rebounded in recent months domestic demand has risen.
So how will the tariffs affect the recycling industry? Haley said that the tariffs will probably affect the recycling industry favorably in the short term; after that it depends on how negatively the world economy is affected by the potential, possibly likely, trade war that ensues.
“The recycling industry has benefitted greatly from exports to emerging markets, especially to rapidly developing economies where steel consumption has been growing fastest,” Haley said. “These economies will be badly hit by any trade war that results in an increasingly closed U.S. economy.”
Furthermore, some experts feel that with the tariffs as announced, costs will go up in industry after industry, demand will falter leading to production declines and job losses.
“With the likely retaliation by trading partners metals industry workers, after initial job gains will start to suffer job losses” Haley said. “In a worst case scenario, the world economy will drop into a recession, and possibly a depression. Economists disagree on whether U.S. imposition of tariffs in 1930 were a major cause of the Great Depression or merely greatly exacerbated it, but either way indicates that provoking a trade war is not something to be undertaken lightly.
Published in the April 2018 Edition
