If you ask 100 procurement professionals whether or not the Section 232 steel and aluminum tariffs have helped or harmed them, 100% will say the tariffs harmed them.
After fielding hundreds of calls from metal-buying organizations this past year, we here at MetalMiner can definitely say that metal-buying organizations have felt “tariff pain.”
But at the same time — and there is a big but — many companies mitigated much, if not all, of that price risk by deploying effective sourcing strategies.
The recent press attention given to the alleged “harmful effects” of Section 232 tariffs on aluminum and steel on consumers and businesses appears to be ill-informed.
Before we dive into the details, let’s set the record straight on where steel and aluminum prices appear today, where they were when tariffs went into effect and where they were before tariffs.
Let’s start with hot-rolled coil (HRC):
Wait a Second, Rewind…
Two points if you said “wow, it looks like steel prices reached similar highs in 2011.”
To be fair, tariffs did lift steel prices in 2018 to 10-year highs, but prices have declined steadily since last July (four months after tariffs went into effect).
Today’s price levels now appear within the same range in which they traded back in 2011-2015. It’s hard to see how the consumer faces a hefty bill for HRC prices due to tariffs now or for any prior extended length of time.
A similar price dynamic applies to cold-rolled coil (CRC), with a little twist:
What’s the twist, you might ask?
CRC prices remain higher than they did during some of 2016, but they now appear at 2017 levels. CRC prices hit higher levels back in 2011 and 2012 (ironically, no mainstream media outlet said steel prices had harmed consumers back then).
Let’s take another look at steel data, this time for steel mill products:
In this chart above, on an inflation-adjusted basis, the April 2019 PPI for steel mill products now rests under its average over the last 15 years! Clearly, many other years saw higher-than-average prices for these same steel products.
Undoubtedly, we saw a price run-up for steel after the tariffs went into effect back in March 2018, but commodities had already entered a bull market many months prior (July 2017). In bull markets, all prices tend to rise. We would argue that tariffs provided price support, but the claims on the cost impact to consumers appears baseless.
Let’s see what the price data tells us about what happened to aluminum:
Aluminum, Oddly, Looks Like Steel
With the exception between July 2015–July 2017, aluminum prices today remain well within their historical 10-year average. Certainly, ingot prices have not harmed the consumer! Prices appeared much higher in 2012 than they ever did with the Section 232 tariffs.
It is fair to say that tariffs have in part, and only in part, had a negative impact on the Midwest premium, causing it to remain artificially high and above its 10-year average:
This, combined with two large production automobiles switching to all-aluminum bodies in 2018 (the Lincoln Navigator and the Ford Expedition), meant the entire market heard the giant sucking sound of semi-finished commercial grade aluminum (e.g. 5052) come out of the market, resulting in skyrocketing conversion premiums that remain stubbornly high. We’d argue that comes down more to the large automotive OEMs taking up U.S. capacity as opposed to the impact from tariffs.
If You Still Think Tariffs are Bad
Let’s say you buy into the “trade war” mantra. Most businesses we work with judge their company’s performance on one simple measure: profitability.
So, what do EPS or EBITDA data tell us?
We looked at Global Industry Classification Standard (GICS) data across 18 different metal-consuming industries (see above).
The results actually surprised us.
Twelve industries reported higher profits, while six industries reported lower profits.
Industrial conglomerates, communication equipment manufacturers, utilities, autos, energy, equipment services and household durable goods companies all saw profit declines in 2018.
However, machinery profitability increased big time – by 23%. Construction and engineering profits jumped 13%, and aerospace and defense increased by 9%. Most other metal-consuming industries held steady or saw no impact on profitability from tariffs.
If you summed up these same industries in actual dollars, 2018 profits exceeded 2017 profits; in fact, 2018 profits reached a five-year high.
In short, we have a booming economy, strong profits and low unemployment. Metal prices have followed a normal macroeconomic cycle.
Effective Sourcing Strategies
Many buying organizations locked their steel and aluminum purchases forward, either financially through the CME or LME, respectively, or through their service center partners back in December 2017 through January 2018. Their contracts included provisions to lock value-added processing costs for the longer term, while others came into the market to “buy on the dips.” Those buying organizations that used a CRU quarterly trailing average saw big price increases, but now benefit from falling prices.
Commodities move from bear to bull and back to bear markets cyclically. Tariffs — at least, Section 232 tariffs for steel and aluminum — have not resulted in undue “costs” to consumers. The data from 2011-2012 shows us metal prices can rise to similar levels as they did in 2018 without tariffs.
Blaming rising prices on Section 232 tariffs and a trade war might sound convenient but lacks all historical price perspective.
See our earlier three-part series on:
- The questionable assumptions on which tariff impact studies rely
- History of Section 232 cases
- Why tariffs are not bad for the economy
What do you think? Leave a comment below!