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US Steel Imports Drop YTD on Trade Actions: Worries Ahead?

Lingering uncertainties surrounding Section 232 tariff exemptions pose as risk to the American steel industry.

U.S. steel imports have dropped year to date thanks to broad-based tariffs which the Trump administration imposed on imported steel under Section 232 of the Trade Expansion Act of 1962.

According to the latest report from the American Iron and Steel Institute (“AISI”) – an association of North American steel makers – total and finished domestic steel imports are down 10.6% and 13.4% year over year, respectively, year to date (through the first ten months of 2018) to roughly 29.44 million net tons and 22.08 million net tons, respectively. Per the AISI, these figures are based on preliminary U.S. Census Bureau data.

The biggest offshore suppliers for the first 10 months were South Korea with 2,479,000 net tons (down 26% year over year), Japan with 1,169,000 net tons (down 11%), Germany with 1,100,000 net tons (down 5%), Turkey with 1,041,000 net tons (down 50%) and Taiwan with 913,000 net tons (down 21%).

Finished steel import market share was estimated at 21% year to date. For 2018, annualized total and finished steel imports are expected to decline 7.4% and 10.4% year over year respectively, per the AISI.

Tariffs – A Respite for U.S. Steel Producers

The 25% tariffs on steel imports, which the Trump administration levied in March, have injected a new lease of life for the U.S. steel industry. The tariffs have provided the much-needed protection to American steel producers who have long struggled to cope with a tide of cheap foreign imports. The punitive tariffs appear to be bearing fruit as reflected by a decline in U.S. steel imports year to date (through October 2018).

Moreover, the tariffs have provided a thrust to U.S. steel prices as reflected by the significant run-up in benchmark hot-rolled steel prices this year, giving American steel makers more pricing power. Higher U.S. steel prices are driving the profitability of domestic steel makers. Leading U.S. steel companies such as United States Steel Corp. X, Nucor Corp. NUE, Steel Dynamics, Inc. STLD and AK Steel Holding Corp. AKS gained from higher realized steel prices in the third quarter.

The tariffs are also boosting production capacity of domestic steel makers amid lower imports. U.S. steel industry capacity utilization is currently hovering above the 80% mark (the minimum rate required for the long-term viability of the industry), reflecting the impact of the tariffs.  

Capacity utilization rate – a key metric in the steel industry – reached 81.3% for the week ending Nov 24, up from 73.3% a year ago, according to data released by the AISI. U.S. capacity utilization rate was estimated at 72% in 2017. A flood of subsidized imports led to the tepid utilization last year.

Uncertainties Surrounding Tariffs Prevail

While the trade actions have provided a breather to U.S. steel makers so far this year, there are still uncertainties surrounding the tariffs including exemptions of countries.

Following the initial tariff announcement, President Trump softened his stance and made concessions in the tariff order by excluding a number of countries while leaving room for other nations to negotiate exclusions from the tariffs. The Trump administration has already reached quota agreements on steel imports with Argentina, Brazil and South Korea. There is a possibility that more countries will be exempted from the tariff orders on the basis of quotas. This may thwart the administration’s efforts to stem the influx of cheaper imports.

The Trump administration, in May 2018, moved ahead with tariffs on steel and aluminium imports from Canada, Mexico and the European Union (EU) following the expiration of temporary exemptions on these major U.S. allies. With this, all tariffs on steel imports went into effect from Jun 1, 2018. This marked a welcome move as Canada and Mexico are two major sources of steel imports to the United States, together representing roughly a quarter of U.S. steel imports.

Canada is the largest steel exporter to the United States, accounting for roughly 16% of total U.S. steel imports in 2017, per the U.S. Census Bureau data. Mexico is the fourth-largest exporter of the metal with around 9% market share.

However, there is an increasing pressure from various industry groups on the U.S. administration to remove the tariffs on steel and aluminium imports from Canada and Mexico. All three countries are expected to officially sign the United States-Mexico-Canada Agreement (“USMCA”) to replace the existing North American Free Trade Agreement (“NAFTA”) at the G20 leaders' summit in Argentina that starts this Friday.

The tariff issue was left unresolved when the countries announced the USMCA deal in September. Canada and Mexico have been pushing the Trump administration to remove the tariffs ahead of the formal signing of the USMCA deal. There is likelihood that Washington will eventually lift the tariffs and replace them with restrictive import quotas. As such, lingering uncertainties surrounding tariff exemptions pose as risk to the American steel industry.

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