Articles in Category: Public Policy

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Before we head into the weekend, let’s take a look back at the week that was with some of the stories here on MetalMiner:

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  • Sohrab Darabshaw covered India’s view of the Regional Comprehensive Economic Partnership (RCEP).
  • The oil price has plunged — MetalMiner’s Stuart Burns looked into the reasons why.
  • October global crude steel production jumped 5.8% year over year, according to data in a recent World Steel Association report.
  • A recent Section 301 report by the United States Trade Representative on China’s trade practices painted a familiar picture.
  • Through the first 10 months of the year, steel imports were down 11% compared with the first 10 months of 2017.
  • There is talk of a potential merger between two Chinese steelmakers whose combined annual capacity would exceed that of the U.S. as a whole.
  • Housing starts in October were up from the previous month.
  • General Motors’ announcement this week of plant closures and a 15% workforce reduction could be a sign of cost-saving measures to come for other automotive brands.
  • Several CEOs spoke earlier this week during a panel discussion event in Washington, D.C., focusing primarily on the impact of the U.S.’s steel and aluminum tariffs.
  • Lastly, in case you missed the news earlier today, the U.S., Canada and Mexico signed the United States-Mexico-Canada Agreement during the G20 summit in Buenos Aires (the trade deal still needs to be ratified by each country’s legislature).

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With the United States-Mexico-Canada Agreement (USMCA) potentially being signed by the three parties this week during the G20 Summit in Buenos Aires — which will take place over two days, Nov. 30-Dec. 1 — the trade deal and tariffs are on the minds of industry CEOs, from manufacturing to agriculture.

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Several industry executives gathered in Washington, D.C. Tuesday for a panel discussion on the impact of the U.S.’s Section 232 steel and aluminum tariffs and their relationship to the USMCA.

Speaking at the event were:

  • Michael Dykes, CEO, International Dairy Foods Association
  • Jennifer Thomas, vice president, Federal Government Affairs, Alliance of Automobile Manufacturers
  • Buddy Stemple, CEO of Constellium, Aluminum Association member
  • Brandon Skall, CEO and co-founder, D.C. Brau, Brewers Association member
  • Catherine Boland, vice president, legislative affairs, Motor Equipment Manufacturers Association

Heidi Brock, president and CEO of the Aluminum Association, also offered opening remarks during the event, reiterating the Association’s public stance that Canada and Mexico should be granted quota-free tariff exemptions. (Brock also spoke on the subject during a U.S. International Trade Commission hearing earlier this month.)

The focus should be on China, not Canada and Mexico, Brock said, according to a transcript of her remarks.

“Across-the-board tariffs are not addressing the problem of China’s illegally subsidized aluminum overcapacity,” she said. “We have seen very little evidence that the Section 232 tariffs are impacting behavior in China, which continues to illegally subsidize its aluminum industry. China’s aluminum capacity has grown by 73 percent over the past five years, and an additional eight percent just this year, despite the Trump administration’s tariff regime. In fact, there is some evidence that the tariffs may actually be helping Chinese aluminum producers to enter new markets by increasing China’s price advantage over aluminum produced in North America.”

According to a Reuters report earlier this month, Ildefonso Guajardo, Mexico’s economy minister, said he expects the U.S., Mexico and Canada to sign the USMCA during the G20 Summit.

Buddy Stemple, CEO of Constellium Rolled Products, a downstream aluminum manufacturer based in Ravenswood, West Virginia (primarily serving the aerospace, automotive, packaging and defense industries), applauded the Trump administration for its trade actions on Chinese common alloy aluminum, but, like Brock, indicated the Section 232 tariff on aluminum casts too wide of a net.

“And the Section 232 tariffs, which imposes a 10 percent tariff on virtually all aluminum and aluminum product entering the United States – not just from China but from all countries – is the wrong solution to a real problem,” he said, according to a transcript of remarks. “While well-intentioned, the tariffs are making the U.S. aluminum industry, including Ravenswood, less competitive on the world stage.”

The U.S. aluminum industry does not make enough to support domestic demand, he argued, an argument we echoed yesterday in our discussion of the tariff waiver process:

In the case of aluminum, a real common alloy shortage exists. The exclusion request process ought to consider where the U.S. runs market deficits and shortages versus only who, in theory, can produce the particular metal.

The same can not be said for many of the common forms of steel, where ample domestic supply exists to meet demand.

He also called for a USMCA without steel and aluminum tariffs for Canada and Mexico. In addition, referred to the “unintended consequences” of the administration’s tariff exemption process.

“Requests for massive volumes of common alloy aluminum sheet have been approved, even though some of these imports are coming from China,” he said. “In particular, the approval of exclusion requests by Ta Chen International now allow for import of more than 1 billion pounds of Chinese common alloy sheet – a substantial share of the U.S. market for common alloy products.”

Continuing in the same vein, Jennifer Thomas, of the Alliance of Automobile Manufacturers, referred to the statutory basis for the Section 232 tariffs.

“At the end of the day, Canada and Mexico are not national security threats,” Thomas said.

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All eyes will be on Buenos Aires tomorrow and Saturday, when G20 leaders will convene. Global markets will be looking to the summit for developments with respect to USMCA (i.e., its potential signing and whether the steel and aluminum tariffs will be removed for Canada and Mexico) and whether President Donald Trump and Chinese President Xi Jinping can make any progress with respect to the ongoing U.S.-China trade war.

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This morning in metals news, U.S. senators are asking for an independent review of the Trump administration’s Section 232 tariff waiver process, LME copper is down for the third straight day and Chinese steel mills are preparing for difficult times ahead.

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Another Look

The review of Section 232 tariff exemption requests from domestic companies has been going on since June, and the process has come in for much criticism.

According to a Bloomberg report, a bipartisan group of senators have asked for an independent review of the tariff waiver process, noting that as of last month only about one-third of the approximately 50,000 requests had been addressed.

LME Copper Down Again

London copper has been on the slide of late, dropping Tuesday for the third straight day, Reuters reported.

According to the report, the drop comes after comments by President Donald Trump to the Wall Street Journal related to China. The president said it was unlikely the U.S. would agree to China’s request to delay the scheduled Jan. 1 tariff rate increase — up to 25% from 10% — on the previously announced $200 billion tariff package.

Chinese Steel Mills Hit a Rough Patch

According to another Reuters report, Chinese steel producers posted losses for the first time in three years.

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Per the report, as a result of falling prices, some mills are looking to utilize more low-grade iron ore in the steelmaking process in an effort to tamp down costs.

MetalMiner’s Take: In markets in which profit margins erode, simple supply and demand fundamentals ought to take hold — producers ought to limit supply to boost profits.

In the U.S., producers did exactly that for years and years, operating at below 80% utilization rates (U.S. producers have only recently hit those production rates as a result of the tariffs, the bullish commodity market and a booming economy).

When Chinese producers start to run losses, those producers ought to take a lesson from their American peers — and limit production to shore up profits.

But Chinese steel producers won’t do that. In fact, they will do the opposite — continue to produce, even at a loss, to keep people employed.

And once again, that excess steel will flow to the rest of the world.

Too much steel always has and always will put a lid on prices. Therefore, steel-buying organizations will want to watch very closely how much steel China produces, as well as the price per ton, as Chinese steel production and steel prices lead the U.S. market.

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Yesterday, we noted a recent Aluminum Association letter, in which the industry group claimed the Department of Commerce’s Section 232 tariff exclusion request undermined the domestic aluminum industry.

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On Tuesday, the Coalition of American Metal Manufacturers and Users (CAMMU) also weighed in with its thoughts on the process.

Beginning in June, the DOC began receiving requests for exemptions from the steel and aluminum tariffs, as U.S. companies argued that the type of steel or aluminum product they needed is not made in the U.S. in the appropriate quantity or quality they need.

The sheer volume of requests seems to have taken the DOC by surprise. As MetalMiner’s Stuart Burns recently noted, by Oct. 29 the DOC had issued decisions in only about one-third of the nearly 50,000 total requests.

“Ideally, the Department would eliminate the Section 232 tariffs on steel and aluminum imports as it is clear that the utilization rates for domestic producers now exceed the goals set forth when these tariffs were implemented by the President,” the CAMMU release says. “As long as the tariffs remain, it is essential that exclusion requests are processed in a fair, transparent, and expeditious manner.”

In its letter, addressed to Secretary of Commerce Wilbur Ross, CAMMU explains that while the changes introduced to the tariff exclusion process in September were a nice start, further improvements are needed.

CAMMU specifically calls out statements from metals producers in formal objections that do not meet the “available immediately” threshold, defined as being able to supply within eight weeks.

“Objections to exclusion requests available on the Regulations.gov website reveal numerous vague assertions that clearly could not meet the ‘available immediately’ threshold set forth by the Department,” CAMMU argued. “The Department should reject these objections outright. For example, steel and aluminum producers regularly disregard the process for quality and testing that steel‐ and aluminum‐using manufacturers must go through with their customers prior to acceptance of products.”

In addition, CAMMU opined that the typical timeline for the resolution of a tariff exclusion request is too long, particularly given the just-in-time nature of some manufacturing. In the letter, CAMMU said the DOC should accept exemption requests in cases for which it receives no objections (or if it receives an incomplete objection).

CAMMU said the timeline manufacturers face vis-a-vis the exemption request process is too slow:

We also believe the stated 106 day timeline from date of posting does not fully reflect the delays faced by requesters. According to available data, American manufacturers must wait on average nearly 23 days, and almost 17 days for aluminum exclusion requests, before the Department posts their steel exclusion requests on regulations.gov. In the best of circumstances, this means that the average U.S. manufacturer must wait more than four months for the federal government to determine whether its most important input is subject to a 25% or 10% tax. No manufacturer can afford to lose one‐third of the entire calendar year waiting for a response made in a system that places greater weight to the objections raised than to the facts presented by actual purchasers of the raw materials.

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CAMMU’s full letter is available here.

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This morning in metals news, China’s October steel output hit a record high, workers and management at U.S. Steel have reached an agreement on a four-year labor deal and the Aluminum Association in a letter criticized the Department of Commerce’s tariff exclusion process.

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Steel Output Jumps Ahead of Cuts

According to a Reuters report, steel output in China surged in October before winter cuts take hold.

China’s steel output hit 82.55 million tons in October, according to the report, up from 72.36 million tons in October 2017.

MetalMiner’s Take: China’s record production output and low capacity utilization rates will continue to put price pressure on global steel markets. Historically, the winter production curbs really don’t dent the glut of excess steel produced by China. MetalMiner pays careful attention to Chinese steel prices, which have largely weakened.

Excess capacity and sluggish demand suggest a weaker global steel price environment. Buying organizations will want to pay careful attention to actual emissions cuts to see if Chinese prices will rise.

Steelworkers OK Four-Year Contract at U.S. Steel

Steelworkers at U.S. Steel have agreed on a four-year labor deal, the Pittsburgh Post-Gazette reported.

According to the report, the contract covers 16,000 workers and includes a 14% wage increase over the four years.

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Aluminum Association Says Exclusion Process ‘Undermines’ Domestic Industry

The Aluminum Association penned a letter this week in which it criticizes the now much-maligned tariff exclusion process, saying it “undermines” the domestic aluminum industry.

The letter — addressed to Hillary Hess, director of the Bureau of Industry and Security’s Regulatory Policy Division — says the “inherent uncertainty of the product exclusion process is actually adding an unnecessarily prolonged cost burden to our members and their customers and chilling investment in the aluminum industry, rather than promoting domestic production.”

“The status quo is therefore undermining the intent and the underlying national security rationale of the Section 232 remedy,” it continues.

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Reading like Tolstoy’s “War and Peace,” an epic article in The New York Times explores the background and history of Oleg Deripaska’s battle to initially gain acceptance in the West and, later, to save his companies — notably Rusal and its holding company En+ — from potentially bankrupting U.S. sanctions.

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What comes across strongly from the article, whether you necessarily feel The New York Times has a political point to make or not, is that acceptance in Western capitals and among the Western business elite can be bought via lobbyist and media firms.

Deripaska has spent tens of millions over the last few years trying to buy his way into a position where he is recognized as a respectable businessman and reputable member of the global business community. To its credit, Washington has been the standout obstacle to his campaign to gain visa-free travel and recognition.

While U.S. lobbyists, senators and businessmen have been paid millions on his behalf, successive administrations of both political hues have resisted the pressure to give him unfettered acceptance.

At heart, this is down to deep misgivings about how he came about his vast aluminum empire, his reported links to organized crime and his undoubted closeness to the current Putin administration.

While the details of Deripaska’s reportedly sordid past make interesting reading, into which The New York Times goes into considerable detail, of more interest to our readers is the likely fate of sanctions against Rusal and any minority shareholdings En+ holds in other downstream aluminum companies (which have been causing no end of problems this year, disrupting aluminum supplies and causing price volatility).

The upshot of The New York Times’ view is that the successful hiring of an army of lobbyists and repeated delays in applying the threatened sanctions points to the probability they will never be applied.

The current, several times postponed, end date is Dec. 12, but both the market and political observers are of the view this date too will pass without any sanctions being applied, despite the fact Deripaska has not sold down his shareholding in En+ or relinquished real control of his aluminum (and nickel) empire.

For aluminum consumers, that is good news — we don’t need to remind anyone of the price spike earlier this year that resulted from the initial announcement of the sanctions.

The aluminum price is currently languishing below the level it was prior to the sanctions announcement and subsequent price spike, suggesting the market is totally sanguine about any chance of sanctions actually being applied. The resulting disruption to the supply chain following the announcement of sanctions seems to have sent a reality check to Washington that has been heeded and every effort has been pursued to reach a compromise of saving face while also avoiding a repeat.

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The chances are “sufficient evidence” will be found that Deripaska has stepped back from day-to- day control to justify a shift of focus from En+ and Rusal as investment vehicles to Deripaska as an individual.

In a tight aluminum market, that’s just what consumers will be looking to hear.

Readers in North America can be excused for puzzling why Europeans worry overly about the so-called “Eurozone crisis.”

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They seem to come around periodically. There is a great deal of noise and some volatility in the stock markets, but eventually — whether it is Greece, Spain, Portugal, Ireland, or a combination of several economies — the E.U. seems to have muddled through such crises over the last decade.

Even Brexit is confining its impact to the U.K. economy and has largely left the rest of the E.U. unaffected. But Italy’s latest budget proposals hold the potential for serious disruption, not least because it is the Eurozone’s third-largest economy and a founding member of the trade agreement started in the years after World War II — so its impact is proportionately significant.

So, what is the problem this time, you may ask?

Well, Europe has been slow to recover from the financial crisis of 2008. Debt ballooned in many countries and under the constraints of a fixed currency managed to the advantage of rich northern states like Germany, balance of payments deteriorated as the north imposed austerity on the south (or so many southern states saw it).

The rights or wrongs of the Eurozone’s structure aside, countries like Italy have been constrained for the last decade by fiscal rules set in Brussels. The Italian economy has lagged behind the rest of Europe — unemployment is high and growth is low. As the graphs below courtesy of Stratfor illustrate, the populace has had enough.

Earlier this year, they even surprised themselves by voting in a populist coalition on a platform of radical reform and reflation. That is a policy that puts them at loggerheads with Brussels, which has demanded an Italian deficit reduction that should see the deficit grow by just 0.6%, down from an expected 1.6%, to be achieved by increased austerity measures.

Italy’s new government, a coalition of the Five Star Movement and the League, have presented Brussels with a budget that would see the deficit rise to 2.4% next year, three times higher than an E.U.-mandated target and which Barclay’s Bank is quoted as predicting in The Telegraph will likely exceed 3%, even without a global economic downturn next year.

Italian 10-year debt yields have surged as a result, up near 300 points, not quite at the 400 level seen in the crisis of 2011 but a record four-year high. So far they are only talking about the budget, but nothing has been implemented. After years of QE, banks are holding some €387 billion (U.S. $444 billion) of state debt.

As The Telegraph report observes, banks face mark-to-market losses as yields rise. This erodes their capital buffers, forcing them to curtail lending and further crimping growth. Or, they might have to sell some of their bonds, creating pressure for yields to rise higher.

Either action can quickly turn into a self-feeding “doom-loop,” the paper suggests, as the banks and the sovereign state take each other down.

There is not going to be an Italian sovereign default. Although there are reports of capital flight to Switzerland, it is very unlikely there will be a run on Italian banks as there was in Greece.

However, Italy’s sheer size and core membership of the Euro means Brussels and Rome cannot allow the current standoff to escalate out of control.

Like a runaway super tanker, the situation cannot be easily contained like it was in Greece if the markets genuinely take fright.

You have to have some sympathy for Italy. State spending has always played a massive part in keeping a country together, where geography, history and culture constantly try to tear it apart, a report by Stratfor observed.

Reports of riots in Rome over the appalling state of public services underlines the popular will for public investment, regardless of austerity measures demanded by Brussels. So far, the government has a clear popular mandate to ignore Brussels and go for debt-fueled growth.

Brussels, likewise, is equally set against allowing Italy to buck the rules. The two are on a collision course and set against a backdrop of slowing global growth — outside of the U.S., at least — the economics are not in either party’s favor. Global growth or risk appetite are not going to mitigate the impact of an increasingly indebted Italian economy.

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The stage is set for a potential crisis.

We are not there yet, but in an increasingly nervous investment climate, it could prove a factor in a wider global stock market fall and global retrenchment.

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This morning in metals, members of the House are asking the Trump administration to allow tariff exclusions (related to the latest round of tariffs levied against China), Chile’s state copper miner has plans to extend the life of one of its copper deposits and BHP reported a sharp year-over-year increase in iron ore production.

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House Representatives Ask for Tariff Exclusion Leeway

A group of 169 members of the House have signed a letter addressed to U.S. Trade Representative Robert Lighthizer, CNBC reported, in which they ask the Trump administration to allow for tariff exclusions with respect to the latest round of tariffs imposed on Chinese goods.

MetalMiner’s TakeMidterm elections will provide the first clue as to whether or not Congress will have the ability to weigh in on the impact of tariffs.

Unlike the Section 232 tariffs and the 301 tariffs, the latest round of tariffs does not include a formal exclusion process. A bipartisan group of Congressional representatives has now urged U.S. Trade Representative Lighthizer to allow for exclusions.

Still, any potential benefit to buying organizations in the form of an exclusion appears, at least for the short term, to have limited scope and impact.

Codelco Submits Environmental Assessment of Salvador Deposit

According to a Reuters report, state-owned Chilean miner Codelco has submitted an environmental assessment related to plans to overhaul its Salvador copper deposit.

Per the plans, the move would extend the life of the deposit by 40 years, according to the report.

BHP Iron Ore Production Rises

BHP’s Q1 iron ore production rose 8% year over year, the miner said Wednesday according to a Reuters report.

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Brazilian miner Vale also recently reported a significant uptick in iron ore production. (MetalMiner’s Stuart Burns wrote on the subject of iron ore and its defiance of current market trends.)

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A new Cold War — does that sound ridiculous? Does it sound alarmist?

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It would have been a month or more back, but today it is a plausible statement.

A post by Edward Luce in the Financial Times refers to a Bloomberg expose reporting on how China’s People’s Liberation Army has installed secret micro-chips on motherboards that were used to operate big corporate data servers, giving them unprecedented access to American military and technology secrets on an epic scale.

The microchips are said to be smaller than a grain of rice and thinner than the tip of a sharpened pencil, yet could provide backdoor access into the most secret of American technology. We quote Luce when we say, according to Bloomberg, China may have infiltrated U.S. military hardware, including drones, fighter jets, and so on.

It must be said, major retail hardware providers like Apple vehemently denied the existence of such malicious chips, but Bloomberg’s investigation has been going on for three years and begs the old saying — no smoke without fire.

The investigation apparently is still ongoing. But the consequences, coming on top of an escalating trade war and recent military skirmishes in the South China Sea, herald a new superpower rivalry.

There may be some who scoff at the suggestion that China could rival the U.S. as a superpower, but that is to misunderstand the trajectory of history.

China is on the rise, faster in terms of technology than it is even economically.

Take these secret microchips. As Luce points out, the creation and clandestine inclusion of such sophisticated technology is so hard to pull off that it was likened by a professional hacker to getting a unicorn to jump over a rainbow. It would take years, the article suggests and the deepest knowledge of how to manipulate the most cutting-edge technology across the global supply chain, for China to do this — yet, it did.

Roughly 75% of U.S. smartphones and 90% of semiconductors are made in China; it is safe to bet that domination is set to decline, but it can’t happen overnight.

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In a heated and politically charged scenario, it is not unrealistic to think government will mandate or reward firms that reshore technologically sensitive supply chains, with profound implications for what has become a hugely interdependent world.

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This morning in metals news, the Aluminum Association expressed its disappointment in the United States-Mexico-Canada Agreement (USMCA), the Pentagon is reviewing the U.S.’s dependence on foreign sources of critical materials (including rare earths from China) and Section 232 steel tariff exemption requests continue to rise.

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Section 232 Aluminum Tariff

Not everybody was happy with the recently hailed United States-Mexico-Canada Agreement (the agreed-upon rebrand of the North American Free Trade Agreement, or NAFTA).

The Aluminum Association on Monday expressed its disappointment that the deal did not address the Section 232 aluminum tariff, which continues to apply to both Canada and Mexico.

“The Aluminum Association is disappointed that the Section 232 aluminum tariffs were not addressed as a part of the United States-Mexico-Canada Agreement (USMCA),” Aluminum Association President and CEO Heidi Brock said. “Now is the time for the United States to work with Canada and Mexico to provide a full exemption – without quotas – for aluminum imports from those countries. This should occur as soon as possible, and certainly before the final agreement is signed.”

MetalMiner’s Take: A confluence of factors continue to significantly impact aluminum prices and availability.

In terms of availability, Hydro’s Alunorte alumina refinery in Brazil has halted production due to an environmental dispute with the Brazilian government (alumina is the key raw material used to make aluminum). This sent aluminum prices up by 2% today.

The fact that the newly negotiated USMCA did not address the 232 tariffs on aluminum means the 10% tariffs on Canadian aluminum remain intact, which will also continue to support aluminum prices. Buying organizations are now experiencing a real tightness for semi-finished materials and many must source offshore or via Canada to meet manufacturing production schedules. The sanctions on Rusal also go into full effect Oct. 23.

Pentagon Reviewing Sources of Critical Materials

It’s no secret that the U.S depends on foreign sources for a number of critical materials, including, among others, rare earths from China (used in a wide variety of high-tech applications).

According to a Reuters report, the Pentagon is reviewing the U.S.’s dependence on certain critical materials, with plans to eventually release a report of its findings. In addition, the report indicates China will serve as a primary focus of the review.

Exemptions Continue to Rise

Requests from U.S. firms looking to win exemptions from the U.S.’s 25% steel tariff have continued to pour in, even into October, seemingly far exceeding what the Department of Commerce had initially expected when the process began in June.

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According to a MarketWatch report, as of Oct. 1. 35,872 steel tariff exemption requests had been filed, with 5,954 requests having been approved (9,057 decisions have been posted).