President Trump announced last week that his administration is investigating whether imports of steel threaten the U.S. national security. This follows earlier administration plans to initiate trade enforcement cases involving countries such as China, Germany, Mexico, Japan, Canada (yes, Canada) or South Korea. Shares of U.S. steelmakers rallied on the news that the Trump administration could widen the probe against imported steel products.
There is almost no difference in steel whether it’s produced domestically or in China, at least for the more commodity-grade steel products. The main difference, as many argue, is that the production of steel in the U.S. causes less environmental damage due to stricter environmental regulations.
The U.S. placed several anti-dumping and countervailing duty orders on steel products, but they had not substantially reduced the amount of steel entering the country. Steel imports account for roughly a fourth of total steel consumption in the United States. Now, import numbers are down 30%-plus from recent years but the impact has been more modest than many market participants would have predicted.
The potential of a blanket import tax comes as U.S. prices trade at unsustainable levels compared to international prices. That’s because since March, domestic prices have risen while prices in China have fallen sharply. The sell-off coincided with a big sell-off in seaborne iron ore. The declines come amid concerns that previous rallies had taken prices too far. In addition, China’s crude steel output surged to a record 72 million metric tons in March. However, prices could recover if China’s promises to address rampant, persistent overcapacity take hold sooner rather than later.
The point is, that although a wider international price spread is partly justified by more stringent import tariffs, this phenomenon has historically led to rising import volume. Unless the new investigation materializes into something, U.S. steel prices will likely find downward pressure if world export prices continue to slide.
What This Means For Metal Buyers
Momentum in U.S. steel prices has cooled down. This is because the international price spread has widened to record levels. If the U.S. imposes a new import tax on steel, that will likely keep this price spread wide. However, Chinese steel consumption and higher steel prices is what really represent a sustainable improvement to market fundamentals. Even with a new import tax, U.S. prices are already expensive and U.S. mills will still need a recovery in Chinese prices if they want to be able to justify higher prices. Ultimately, protectionist trade policies might provide only fringe benefits to U.S. steelmakers.