Pain And Gain

Dec. 21, 2004
Manufacturers decry rising costs and lower quality in the wake of steel tariffs; steel producers say give the duties time to work.

Since president Bush enacted steel import tariffs in March, steel supplies have dwindled, and prices have risen. This makes for good news for domestic producers that are receiving more money for their products but bad news for buyers that are paying more for a key material. And just as there was rabid debate over the need for the tariffs -- and still is -- there's wrangling over how much of the current climate was caused by import duties. "What's behind an awful lot of the noise coming from the [steel] consuming population is the pure desire to pay less money," says Robert Muhlhan, vice president of procurement and logistics for Tampa-based AmeriSteel Corp., a maker of "long" products, such as steel reinforcing bars, which haven't been impacted as much by the tariffs as sheet goods. "I don't blame them. Nobody wants to spend more than they absolutely have to, but I don't think you can keep your supply base in a relative position where they have to sell below cost for an indefinite period without some pretty severe negative impacts." Section 201 tariffs, slated to last three years, include duties of up to 30% against about 29% of steel imports -- although exclusions have reduced initial targets. Bush says the tariffs are intended to give U.S. steel producers a "chance to adapt to the large influx of foreign steel" and the opportunity to restructure. Imports subject to Section 201 were up 2% in June 2002 vs. June 2001, but imports of cold-rolled steel were down 65%, according to the Bureau of Census preliminary figures; imports of all steel products were up 3%. A survey of purchasing managers by the Institute for Supply Management (ISM), Tempe, confirmed that tariffs were moving prices higher and extending deliveries in June, and ISM reported that steel, coated steel and flat-rolled steel were in short supply. "We think we see some signs that the President's steel program is beginning to work, and we see some initial signs of recovery, improved operating performance, some stock offerings, increased activity on the consolidation front, and some partial price restoration in some of the flat-rolled products," says Andrew Sharkey III, president of the American Iron and Steel Institute (AISI), Washington, D.C. "How much of that you attribute to the 201 remedy and how much you attribute to other variables is open to debate." Keith Busse, president and CEO of Steel Dynamics Inc. (SDI), Fort Wayne, Ind., a producer of hot- and cold-rolled steel, says 201 has "had some impact, but it was working in conjunction with other market factors." He points to undersupply caused by the bankruptcies of U.S. producers; importers that sat on product while awaiting 201's emergence and then waited as exclusion requests were reviewed; demand increases and the weakening dollar; effects from antidumping cases; and, lastly, the tariffs themselves. Ken Pierce, partner with Willkie Farr & Gallagher, Washington, D.C., and counsel for mills from Japan, Brazil and Thailand in an antidumping case, says market changes started after the shutdown of major integrated producer LTV Steel Corp. but certainly were compounded by the tariffs: "The combined effect has been that imports [of cold-rolled steel] are effectively shut out of the market -- they're down by over 50%; domestic prices are up over $150 per ton; contracts are being broken by domestic mills; customers are being put on allocation [given limited amounts of steel]; and lead times have doubled and tripled in combination with the tightness of supply, both on the domestic side and on the import side." Tight supply and rising prices began well before the tariffs, contends David Phelps, president of the American Institute for International Steel Inc., a trade association that promotes free trade in steel. He says historic low prices that prompted 201 were actually triggered by panic selling of cash-strapped domestic companies in mid-2001, importers abandoning the market as prices plummeted, weak U.S. producers eventually collapsing, and prices rising and supply falling in early 2002. Importers then retreated further as tariffs loomed, domestic producers raised their prices, then tariffs were enacted and "in the blink of an eye we went from a buyers' market to a sellers' market." Phelps adds that tariffs have made availability even more acute, "so severe that Honda reportedly has air-lifted steel to the U.S. I can't even begin to guess what that cost them." Regardless of the stimulus for higher prices, many domestic sheet producers are the beneficiaries. SDI reported Q2 2002 net income of $17.7 million, 785% above Q2 2001, while net sales and total shipments were up 35% and 22%, respectively. Sheet-steel producer California Steel Industries Inc., Fontana, Calif., reported Q2 2002 net income of $11.4 million, a 599% increase from Q2 2001, while Q2 volume was up 13%. U.S. Steel Corp., Pittsburgh, reported $27 million net income in Q2 2002 (which includes $10 million favorable effects from special items), up from a $30 million net loss in Q2 2001. Meanwhile the $40 billion metal-fabrication industry in the North America and other steel-consuming industries are far less enthused by the market swings. Bill Adler, president of $5 million Stripmatic Products Inc., Cleveland, says he's paying price increases of 20%, expecting another 10%, and fearing supply allocations. Stripmatic primarily purchases hot- and cold-rolled steel from domestic producers, and steel accounts for more than 50% of selling prices. Adler's 28-person firm has continuously improved productivity in response to cost-reduction pressures from automotive and truck customers, vendor consolidation programs, and competing imports from Mexico and China, but now, he confesses, it's being squeezed too hard. "We feel we can ride this out for the short term," Adler reasons, "but we know that if the [reappearance of] imports can't bring the prices back down to some sort of reasonable level that allows us to get our profitability back, then we will have no choice but to say we need the price increases, or we can't do this work anymore." Jim Zawacki, president and owner of $30 million GR Spring & Stamping Inc., Grand Rapids, Mich., says his 200-employee company is experiencing price increases of 10% to 25%, delays in receiving steel, and marginal steel quality. He says one customer pulled an order that would have added 10 workers, opting instead for a non-U.S. manufacturer not dealing with 30% tariffs. Not even long-term contracts guarantee steel prices and availability. Dennis Keat, president of $50 million Su-dan Corp., a metal stamper with 180 employees in Rochester Hills, Mich., says since the tariffs, he's had quarterly, semi-annual, and annual steel contracts broken by suppliers, prices have risen 20% to 30%, steel deliveries have been delayed, and the quality of steel he's now forced to procure on the spot market has been inconsistent. The three stampers are faring better than some. "The information on companies that are liquidating, using that as a barometer, is as high as I've seen in 10 years," says Adler. But like AmeriSteel's Muhlhan, Busse and others say prices are not out of whack -- just moving back to a reality. "Of all the crying, wailing, and gnashing of teeth over prices rising, buyers had to start being realistic," Busse says. "If those prices were maintained for another five years, every steel maker in the world would be bankrupt, and nobody would be making any steel." In addition to the 201 tariffs, antidumping and counteravailing duties (AD/CVDs), in place to offset dumped and subsidized imports, have arguably contributed to lower supply and price increases. There were 190 AD/CVDs in place on steel imports as of May, and from 1980 to 2000 steel imports valued at nearly $10 billion had duties imposed, according to the U.S. International Trade Commission. Phelps says the U.S. dumping law "is economically irrational, inconsistent with our [World Trade Organization] policy and needs fundamental reform." Many importers are "mortally wounded by the 201 gun or the dumping gun." But while AD/CVDs keep some imports away, the tariff exclusion process brings many back. As of July 19, the administration had granted 261 tariff exclusions, many more requests were in review, and the deadline for considering exclusions was extended to Aug. 31. Exclusions are intended to remove tariffs when there are no U.S. producers to supply 201-targeted steel, but exclusions issued in July appeared to be aimed at keeping the European Union (EU) from enacting tariffs against $300 million in U.S. products. The EU delayed a decision on trade retaliation until Sept. 30. The AISI's Sharkey says foreign governments, particularly the EU and Japan, are "frankly attempting to blackmail the administration into granting unwarranted exclusions to the remedy." He adds that more than 40 exclusions for flat-rolled products have been granted "over the strong and justified objections of the domestic industry." "We don't want to see the 201 turned into Swiss cheese," says SDI's Busse. "If the industry truly needed time to recover from the debacle of the last three years, it's got to have some earnings momentum, and Wall Street obviously needs to be convinced of that so it can lend into that climate so that we can all reinvest in our future and become more competitive." Included and Excluded -- Steel* subject to Section 201 tariffs:

Excluded due to developing country 7%
Not considered for tariff 11%
Otherwise excluded 15%
Included via presidential order 29%
Considered for tariff but not included 19%
Excluded due to free-trade agreements 19%
Source: U.S. International Trade Commission, May 2002 * Total 32.1 million short tons

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