U.S. Steel Tariffs Create a Double-Edged Sword

American producers capitalize on tighter supplies and higher prices, but costs rise for manufacturers

By John W. Miller

New tariffs on steel imports are shifting the dynamics of the U.S. supply chain. Above, rolled steel at a mill in Dearborn, Mich., in 2012. Photo: Reuters


PITTSBURGH—New tariffs on imports are boosting steel prices in the U.S., offering a lifeline to beleaguered American steelmakers but raising costs for manufacturers of goods ranging from oil pipes to factory equipment to cars.

U.S. steel producers who lost billions of dollars last year amid a flood of cheap imports are looking to capitalize on tighter supplies and higher pricing. That is shifting the dynamics of a supply chain that had come to rely on inexpensive foreign Steel.

“Our government has done a pretty good job of boxing out the guys who were importing the most-cheap steel,” says Stuart Barnett, owner of Chicago-based Barsteel Corp., a steel processor and distributor that sells to a range of manufacturers. “But now the greatest fear we have is that China keeps the cheap steel for itself and makes products that undercut other industries.”

Duties on steel products from China, Brazil, India, Japan and other countries have contributed to the U.S. benchmark hot-rolled coil index rising more than 60% this year to $615 per ton, after falling 33% last year. In Europe, the benchmark index is up by 34%.

Steel imports into the U.S. during the first quarter of 2016 fell to eight million metric tons, down 29% from a year earlier, and inventories also declined.

This spring, major U.S. producers sent out a flurry of letters announcing nonnegotiable increases in prices. On April 15, for example, U.S. Steel Corp. X -2.46 %  wrote to its customers that “effective immediately, base pricing for all new flat-rolled product sport orders is increased by $60 per ton.”

The rise in U.S. prices follows the Commerce Department’s move to impose tariffs in response to an oversupply in the steel industry, especially from China. Some duties are as high as 266%.

Those tariffs, which come during an election season rife with promises to protect American workers, have given U.S. steel mills more pricing power and have curtailed imports of some steel products that are made more cheaply abroad. Some of those products may not even be made in the U.S.

That is helping American producers. U.S. Steel’s share price, for example, has nearly doubled since Jan. 1.

But it is creating problems for some steel buyers.

Brookville Equipment Corp., which makes mining equipment, requires 10 tons of steel to make one mining locomotive, says Marion Van Fasson, president of the Brookville, Pa.-based company. The price increases reduced profit margin on one of those machines by a few thousand dollars.

“It’s not killing me, but I’d love to have lower-priced steel,” said Mr. Van Fasson.

Strong demand from the construction and automotive sectors has put upward pressure on prices, say analysts and steel executives. 

To take advantage of the tighter market, mills are boosting output. The U.S. made 6.6 million tons of crude steel in April, up 2.5% from a year earlier, according to the World Steel Association.

Meanwhile, total global output fell 0.5% to 135 million tons. In China, the world’s top steelmaker, production rose 0.5% to 69.4 million tons. Low costs and subsidies allow China to offer steel at lower prices. The country’s hot-rolled coil index is $361 per ton, about 40% less than in the U.S.

“There’s grumbling that the U.S. mills are taking advantage of a tight market, and the price hikes are too much, too fast,” says Lisa Goldenberg, president of Delaware Steel Co. of Pennsylvania, a steel trading and processing Company.

Lower inventories are being felt through the supply chain. Average delivery times in the U.S. have increased to 6.2 weeks, from 3.6 weeks when the year started, according to Platts’s steel index.

Companies that buy the steel from mills and process it say manufacturers are scrambling for steel. Toledo, Ohio-based Universal Metals LLC, which does $30 million a year in sales, says it has sold 10,500 tons of steel a month in April and May, compared with 4,000 a month last year and early this year.

Its customers, auto suppliers and makers of construction steel, are rushing to buy as much metal as possible, says Vice President Mike Sawyer. “The mills have gotten a little bit greedy,” Mr. Sawyer says of the price increases. “Nobody has time to reboot their inventory.”

He says it is a cyclical market. “Nobody thought to buy when prices were low, and now everybody’s trying to buy when prices are high,” he says.

Some manufacturers are pushing back. In a letter to the Department of Commerce requesting an exemption, Steelcase Inc. SCS 1.13 % Chief Executive James Keane said a tariff on a special kind of Japanese steel could cost one of his subsidiaries $4 million to $5 million a year.

The subsidiary, Polyvision, makes whiteboards for schools at a plant in Oklahoma, where it employs about 50 people. “If nothing changes, we would have to close our Oklahoma plant,” he wrote. “Schools can’t afford to pay more for these whiteboards, so if we raise prices to our customers they will use lower quality substitutes that are likely not made in the U.S.”

Car companies have been lobbying against steel tariffs. In a May 17 brief filed to the International Trade Commission, lawyers for Ford Motor Co. F -2.63 % expressed concern about tariffs. “Innovation and product quality are best served by a cutting-edge, competitive U.S. steel industry; not one walled off from competition,” they wrote. “Availability of fairly-traded imports is important even for industrial consumers such as Ford, which has a long-demonstrated history of de facto preference for U.S.-produced” steel.

The CEOs of America’s top two steel companies said prices had merely returned to normal. “Prices are back to where they should be when steel is fairly traded,” said John Ferriola, chief executive of Nucor Corp. NUE 0.66 % 
             
Last year, “prices went down because of the dumping,” said Mario Longhi, CEO of U.S. Steel, which last year lost $1.5 billion, closed plants, and laid off thousands of workers.

Both men spoke on the sidelines of a recent Pittsburgh steel conference, where the biggest event was a panel on Chinese overcapacity.

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