U.S. Steel and Aluminium Tariffs: What They Mean for Manufacturing Supply Chains

U.S. Steel and Aluminium Tariffs: What They Mean for Manufacturing Supply Chains

Executive Summary

  • President Donald Trump announced on March 8 that the US government would set import tariffs of 25 per cent on steel and 10 per cent on aluminum, which could come into force 15 to 30 days later
  • Domestic capacity constraints, coupled with higher production costs and a protected market position for US steel and aluminum manufacturers, will likely result in higher prices in the US for these raw materials in the foreseeable future
  • While the impact of the tariffs may vary by country, retaliatory measures from major economies such as China may cause ripple effects in other countries and sectors, in particular in the automotive and aerospace industries
  • Indirect impacts may come from a slump in steel and aluminum prices in Europe and Asia as imports from countries unable to export to the US may be diverted to these markets

Background

On March 8, President Donald Trump officially announced that the US government would set import tariffs, a governmental tool to protect domestic industries, of 25 per cent on steel and 10 per cent on aluminum, which could come into force 15 to 30 days later. The move comes after the President ordered a probe in 2017 to assess if imports of steel and aluminum pose a threat to US national security by undermining domestic production. Reports suggested that the US would be vulnerable to supply shortages in the event of a disruption of global trade flows, as it imports about 30 per cent of the steel and 90 per cent of the aluminum used in America per year. An often-cited example highlights that only one of the remaining US aluminum smelters produces the high-purity aluminum needed for military fighter jets; the only other producers are based in the United Arab Emirates and China. Under the national security clause, the President is allowed to impose tariffs without congressional approval. The rationale behind the tariffs is that American steel and aluminum companies have been exposed to unfair practices by overseas competitors, especially Chinese state subsidies that encourage production and lead to overcapacity, which pushes down prices globally.

There is still an uncertainty as to which countries will be most affected by the measures as political negotiations for exemptions are ongoing. The US government stated that for every country excluded, the tariffs will rise to provide the same overall degree of protection. As of March 13, reports indicate that among the major steel and aluminum exporters to the US, Canada, Mexico and Australia may likely be exempted. The European Union, Brazil and Japan have all asked to be exempted from the tariffs.

Impacts on Steel and Aluminium Industries

United States

Using the tariffs, the U.S. government aims to increase U.S. steel and aluminum output to at least 80 percent of capacity, by cutting steel imports by 13.3 million metric tons and aluminum imports by 669,000 tons. U.S. companies in both sectors would be protected from foreign competition and lower- priced foreign steel, gaining market share with higher-priced steel domestically. In view of the tariffs and the prospect of higher prices, steel stocks have risen significantly since March 8. Steel manufacturer United States Steel Corporation has already announced that it will restart one of two idle blast furnaces at its Illinois steel plant, a process that will take up to four months. Likewise, major aluminum producers including Century Aluminum and Alcoa have seen a sharp rise in stocks since March 8, and several producers have announced that they would increase or restart operations due to the tariffs. The U.S. steel and aluminum industry today accounts for about 140,000 and 5,000 jobs respectively, and both industries could add about 5,000 to 10,000 jobs thanks to the tariff protection, according to one estimate.

However, not all U.S. steel manufacturers are set to benefit from the tariffs. Novolipetsk Steel, which produces steel for the machinery and automotive industries, said that it needs a specialty steel product which is not produced anymore in the U.S.. As US steelmakers have only slowly started to adapt production to different grades of steel, the company said that it is likely to lay off workers or close its U.S. plants if customers are not willing to accept higher prices.

European Union

Europe is the largest exporter of steel to the U.S., accounting for more than 20 per cent of total annual imports, with German companies importing the major part of about 4 per cent in 2017. The European steel industry would thus be significantly impacted if no exemption deal can be reached. While two of the Europe’s biggest steel producers, Thyssenkrupp and Voestalpine, have only limited presence in the U.S. market, Swedish steel producer SSAB, which imports extensively in the U.S., will likely be affected by the tariff. Although Europe is not among major U.S. aluminum importers, Austrian and German aluminum producers Rasselstein, a Thyssenkrupp subsidiary, and AMAG Austria Metall AG may be exposed to the tariffs due to considerable exports to the U.S..

Against a backdrop of 1.4 per cent growth in EU steel demand for 2018 and moderate price increases, some forecasts expect EU export of steel to be reduced by only about 1 per cent of total EU production in 2017. However, a diversion of steel and aluminum from countries unable to export to the U.S. due to the tariffs, such as China and Russia, coupled with an unmet demand of excess steel and aluminum output from European producers may lead to a sharp fall in local steel prices in Europe, intensifying competition and threatening tens of thousands of jobs in the European steel manufacturing industry. Some European steelmakers can escape competition from China, which accounts for more than 50 per cent of global steel output, by producing highly specialized steel or avoid being impacted thanks to significant U.S. operations, even benefitting from the tariffs. Others may be forced to lay off workers, cut investment or even declare bankruptcy.

Rest of the world

According to ratings agency Moody’s, Asia will only be minimally affected if no retaliatory measures are taken. The continent accounts for more than two-thirds of global steel supply, but exports of aluminum and steel to the U.S. amount to less than 1 percent of GDP in major countries, including China, Japan and South Korea. While China and Japan export most of their steel to Asia and Europe, South Korean steelmakers may be most exposed to the tariffs, accounting for 10 per cent of U.S. steel imports in 2017. The impact on large Japanese steel producers as well as Brazil’s Gerdau will reportedly also be softened by the companies’ large U.S. operations. Producing domestically in the U.S. will shield steel and aluminum manufacturers from paying the tariffs, although these producers may still need specialized steel products for their production which may not be available in the US. Indirect impacts may come from a slump in local steel and aluminum prices as imports from countries unable to export to the U.S. are likely to surge even if the tariffs are not yet in place.

Impacts on the Downstream Manufacturing Supply Chains

United States

U.S. steel-consuming and aluminum processing manufacturers employ more than 6.5 million and 156,000 workers respectively, far outweighing direct jobs in the steelmaking and aluminum smelter industries. Both steel and aluminum are intermediate goods and various U.S. manufacturing industries use them as major inputs to their production processes. Any disruption to the supply of steel and aluminum materials due to tariffs will thus adversely affect downstream manufacturing industries, threatening 146,000 jobs in 2018 alone, according to estimates of the Precision Metalforming Association.

Domestic capacity constraints, coupled with higher production costs and a protected market position, will likely result in higher prices for steel and aluminum in the foreseeable future as U.S. steel mills and aluminum smelters struggle to become fully operational in the coming months. Since March 8, the U.S. aluminum transaction price for U.S. manufacturers has jumped over 20 per cent, and over 50 per cent since January 2018. Industries ranging from automotive and machinery to aerospace and retail, which rely on competitive prices, are all likely to be affected as costs for supply parts such as car chassis, aircraft wings or steel girders will increase. In this context, manufacturers may face lower profit margins, pass on costs to the end customer, or both.

The automotive industry appears to be particularly exposed to the new tariffs as it accounts for 15 per cent of the steel and nearly 38 per cent of all aluminum consumed in the U.S.. Import tariffs could add USD 3 billion in costs to the car industry through higher prices, and according to the Wall Street Journal, the price for cars bought in the U.S. could rise by about USD 300 on average per vehicle. Following the announcement on tariffs on March 8, stocks of automotive companies in the US, including General Motors, fell amid what is reported as fears that costs for domestic producers using imported parts would rise. General Motors confirmed that it would most likely offset higher prices by reducing profit margins. Toyota Motor Corporation said in a statement that even if most of the aluminum and steel needed is sourced domestically, costs may still rise as steel producers rely on imports of specialized steel and aluminum products.

Similar to the automotive industry, U.S. aerospace manufacturers and suppliers extensively use aluminum in production processes and tariffs have the potential to disrupt the global supply chain, according to the Aerospace Industries Association. However, while aluminum makes up 80 per cent of the weight of some aircrafts, it only accounts for about 12 per cent of the cost and most of it is domestically sourced, potentially causing only 0.1 to 0.3 per cent cost increase per plane due to the tariffs.

Rest of the world

The proposed tariffs would have repercussions for export-focused companies from Japan, Korea or Europe producing in the US, which like local manufacturers, would be faced with higher costs for importing specialized parts which are not manufactured in the U.S.. This may result in major production shifts if, for instance, car manufacturers decided to manufacture and assemble abroad and then import the final product in to the U.S., which would not be exposed to the tariffs. Lower steel and aluminum prices in Europe or Asia may also increase the competitiveness of non-US products, which may lead companies to reconsider investments and future production plans.

Immediate Mid-Term Outlook

As of March 14, there is still a persisting uncertainty as to which countries will or will not be exempted from the tariffs on U.S. steel and aluminum imports. While Canada, Mexico and Australia seem likely to avoid tariffs, other countries or trading blocs are attempting to gain clarity or negotiate exemption deals. The European Union may still be exempted from tariffs in exchange of eliminating trade barriers on U.S. manufacturers and farmers, while other major steel and aluminum importers to the U.S. such as Brazil, Russia, United Arab Emirates, Turkey, South Korea, China and Japan are likely to be impacted by the tariffs.

It is in particular the nature of the U.S. government’s justification for the imposed tariffs which may cause more substantial damages to international trade by undermining established trade rules. As the national security argument has rarely been used to justify a trade restriction and never been litigated upon, failure to challenge the U.S. would set a precedent in which other nations may be willing use the same argument as grounds for tariffs. Most of these countries have threatened to retaliate with tariffs of their own on U.S. imports. Under rules of the World Trade Organization, countries could be authorized to retaliate up to a certain amount on a list of identified import products. The EU has reportedly indicated a list of U.S. products, including motorcycles, steel and agricultural goods like maize, cranberries, and orange juice that may be included in a potential retaliatory move. In addition, the EU is likely to impose import quotas for certain countries of origin to counter significant inflow of diverted steel and aluminum products in to the European market.

For China, airplanes and aircraft parts as well as agricultural products such as soybeans from the U.S. are the likeliest targets for retaliatory measures. Boeing, for instance, sells nearly 70 per cent of its planes to customers outside the US, and 22 per cent to China alone. If joined by Brazil, Russia and South Korea, this would expose between 30-40 per cent of total US exports to retaliatory measures, thus increasing the risk of a global tit-for-tat trade wars.

In the event that the EU adopts countermeasures against U.S. products, U.S. president Donald Trump has threatened multiple times to impose taxes on European cars shipped and sold in the U.S.. Such a move would be particularly harmful for Germany as the US is one of the main markets of its car industry, and cars and vehicle parts are Germany’s largest source of income for goods exported.

Three scenarios are currently being discussed in this context:

First, a move by the U.S. government to impose duties on all car imports may lead to reduced profit margins for German car manufacturers of about 10 per cent, according to an estimate by the German Handelsblatt. A second scenario foresees import tariffs which could only be imposed on countries where European carmakers produce vehicles for the U.S. market. This would not only include other European countries, but also Mexico where many EU car manufacturers have large production facilities. In both scenarios, U.S. car makers would also be affected since they manufacture cars destined for the U.S. market abroad, in particular in Mexico. Thus, the third scenario in which only cars from the EU destined for the U.S. market would be taxed appears to be the most likely. While some EU manufacturers produce cars for the U.S. market domestically, many models are entirely manufactured in Europe before being shipped as finished goods to the US. Such a scenario would be the most targeted measure to cause financial damages to European auto manufacturers.

While the impact of U.S. tariffs on steel and aluminum may vary by country, a global trade war with retaliatory measures from major economies such as Brazil, China and South Korea is likely to cause ripple effects in other countries and industrial sectors. Some countries or trading blocs like Japan or the EU may secure exemption deals in the next two weeks. However, by invoking the rare argument of national security, the US government is likely to force other countries to respond in a similar fashion, hurting global trade flows and with it, industrial sectors from agricultural and machinery to automotive and aerospace.

Recommendations

Everstream Analytics customers in steel-consuming industries such as automotive, aerospace and machinery should monitor the specifics of U.S. tariffs and potential retaliatory actions from major trading partners.

Customers can mitigate potential business disruptions by mapping their supplier and shipping locations, creating an end-to-end visibility on their global supply chain. This would allow a risk assessment of which sub-tier suppliers may be affected by the tariffs or potential retaliatory measures, both from a geographical and product flow perspective. This transparency on the supply chain can also help identify dependencies between different tiers of suppliers may also reveal financial risks such as the risk of higher production costs. By way of example, customers may find that several tier-1 suppliers in the U.S. could both have the same tier-2 supplier, which relies on specialized steel products not manufactured in the U.S.. Due to the tariffs, this tier 2 supplier would be forced to import material at a higher cost, which may increase the price for end customers.

It is also recommended to have a good understanding of where alternative suppliers are geographically located to improve contingency measures like alternative sourcing in case supply disruptions affect your business. Some domestic U.S. suppliers may, for instance, relocate due to higher costs of importing raw materials into the U.S., forcing large manufacturers to look for alternative suppliers or shift production elsewhere. Potential supply chain disruption may also arise from steel and aluminum manufacturers in Europe facing insolvency, as the local market may be overflown with diverted supplies from Asia or elsewhere. Customers are advised to monitor the developments in the financial performance of their suppliers to detect any early indicators of potential insolvency issues.

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