Section 232 Potential Outcomes, Impact Becoming More Clear

Steel and stainless steel buying organizations have expressed concern to MetalMiner about the potential outcome of the current Section 232 steel investigation led U.S. Secretary of Commerce Wilbur Ross.
Benchmark Your Current Metal Price by Grade, Shape and Alloy: See How it Stacks Up
According to a recent Reuters article, Ross, when discussing the Section 232 steel investigation told a Senate Appropriations Subcommittee last week that, “there is a genuine national security issue,” suggesting his agency would make recommendations that would potentially curb steel imports.
He went on to suggest several potential policy recommendations, including: “Imposing tariffs above the current, country-specific anti-dumping and anti-dumping duties on steel products; imposing quotas limiting the volume of steel imports; and a hybrid ‘tariff-rate quota’ option that would include quotas on specific products with new tariffs for imports above those levels,” and intimated that this last option would help mitigate price risk for steel consumers. Ross made several additional comments to allay consumers’ concerns regarding price increases.

Ironically, law firm ReedSmith in an article published on April 28, before Ross’s comments, suggested that he may implement this type of recommendation.
“It is likely that, should the Commerce Department find an impairment of national security in steel imports, a similar license program designed to limit the total volume of imports of steel would be established, probably coupled with an increase in tariffs or fees,” according to the article on the ReedSmith website.
Impact on steel prices
Some have speculated that the forthcoming recommendations would force prices higher, however, we would not necessarily rush to that same conclusion.
The impact will depend upon the specifics of the recommendations, including but not limited to the following considerations:
•    The year used to determine import volumes
•    Whether or not some materials are carved out from the overall recommendations
•    The timeline of recommended actions
•    What the Trump administration will actually implement against the recommendations made by the Secretary of Commerce
Our own research suggests that a tight correlation exists between Chinese steel prices and U.S. domestic steel prices. Without a complete import block, Chinese steel prices will still guide world prices for steel.
For this reason, we remain hesitant to hit the “steel price panic button.”
Overcapacity remains the critical strategic issue
In the meantime, overcapacity threatens more than U.S. steel production and prices.
The linkage to national security remains clear – steel producers that supply mission-critical military grades, forms and alloys stay financially viable by keeping their production lines fully utilized (or as close to fully utilized as possible).
If those companies cannot survive commercially, their production capacity will eventually be shuttered. Many U.S. producers made this argument in their testimony offered to the Department of Commerce in late May.
In China, commercial viability is not a necessary requirement for producing steel.
State-owned entities are permitted, and even financed, to stay operational whether or not they turn a profit. Moreover, when the United States freely accepts Chinese imports, it tacitly accepts “dirty steel” because China does not impose the rules, laws and regulations on its steel industry that the U.S. imposes on its own.
This brings us back to China MES status
Meanwhile, according to a different recent Reuters article, the EU and China failed to reach an agreement on solving the overcapacity issue within China.
Moreover, China refuses to actually mention the words “steel overcapacity,” nor does it provide any solution as to how the country intends to address the issue.
Instead, China insisted that the WTO add clarifying language on MES (market economy status), granting it such status.
For more information on China MES, check out MetalMiner’s microsite.
The missing angle
Though it is easy to view the Section 232 investigation through the single lens of consumer rights to low-cost steel (and look, the vast majority of MetalMiner readers are “consumers” in this context), we’d argue that lens is too narrow.
I have sat in the offices of steel producers who have drawn cost charts and shown me evidence as to how many U.S. steel mills are indeed the most efficient, cost-effective producers in the entire world. But if the U.S. consumer can freely help himself to unfettered cheap imports, we won’t have any U.S. steel production left, nor will we have the alloys, grades and forms of material required by our U.S. military.
Free Download: The May 2017 MMI Report
The linkage is clear – to have access to the materials needed by our U.S. military, we need to have a healthy U.S. steel industry. A healthy U.S. steel industry means a profitable one, too.