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Supply Chain News: "Tariff-ying" Developments in Global Trade, as US Poised to Levy Duties on Imported Steel and Aluminum

 

Amid Tariff Furor, SCDigest Looks at Current State of US Metals Production, Jobs

March 6, 2018
SCDigest Editorial Staff

Details are expected to be released this week by the Trump administration that will enact a 25% tariffs on imported steel and 10% on aluminum, regardless of the country of origin.

The controversial moves come after the US Commerce Dept. recommended the tariffs in early February on both metal products under the grounds the imports were damaging US manufacturers.

Supply Chain Digest Says...

The use of automation and other technology improvements means even if more steel production occurred in the US, it would be unlikely to generate a significant number of jobs.


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Such a move on imports would certainly be well received in steel making states such as Pennsylvania and Ohio. But the move could start a trade war with China and perhaps other countries that would hurt farmers and producers of other goods – thought SCDigest will note that China already lays heavy duties on many US imports, such as 25% on all cars coming into the country.

A Mexican official last week said the country will place retaliatory tariffs on US goods if Trump includes it on a list of nations that would face steel tariffs, though either move seem not permissible under current NAFTA rules - an agreement is in the midst of renegotiations.

The European Union has also threatened to respond with tariffs on American products if the tariffs are enacted on its member countries.

What's more, the resulting rise in steel prices from the tariff would damage a wide swath of US manufacturers, from giant Boeing to hundreds of smaller firms. A Harley-Davidson spokesperson said that "In general, tariffs impact our ability to offer products at a competitive retail price to our customers in any market."

Crucial questions remained unanswered, however, such as whether the duties will apply to all steel products or would exempt semi-finished goods.

For example, Brian Pelke, president of Kay Manufacturing Co., an auto supplier near Chicago, told the Wall Street Journal last week that he is eager to see whether the tariffs apply to steel forgings as well as to raw steel. The company uses forgings to make parts for vehicle engines.

Pelke believes tariffs could help level the playing field between his company and overseas competitors, who he says sometimes ship lower-cost forgings into the US to be made into parts, giving them a price advantage.

"It’s a challenge winning new business when we’re going up against someone from Korea or China," said Pelke, whose company has about 180 employees. "In my small world, this could help."

The tariff moves led us to take a look at the state of the steel and aluminum industries.

According to the monthly industrial output numbers from the Federal Reserve, US production of steel for consumer durables (cars, appliances, etc.) had an index value of 101 in December, versus a baseline score of 100 for the average month in 2012.

In fact, the index hit an all-time high in March of 110. Compare that to output In 1995, when the index hovered around 90, meaning that current US steel output in this category is up more than 10% since the mid-1990s.

Production of steel for construction projects is fairing even better, with an index value of 122 in December, near all-time high of 133 seen in January 2008, and up 22% from 2012. In 1995 the index was around 70, meaning US output is up 74% since then.

Aluminum is a different story. The output index for primary aluminum was only 40 in December, down 60% from 2012. In the early to mid-1990s, the index was in 140-150 range, meaning production has fallen even dramatically since then.

The story is much better, however, for the category of secondary smelting and alloying aluminum products, with the index around 125 for all of 2017, versus hovering around 72 in 1995.

China has simply swamped the market in terms of aluminum capacity, as shown in the chart below from Bloomberg in 2016.


And even though the situation appears better for steel, clearly dozens of mills have close in the US in recent decades, partly due to significant gains in efficiency, partly due to a flood of foreign steel, much of it from Asia, that has not only taken much share in the US and Europe but has also at times driven down prices to a point where steel mills in Western countries were bleeding red ink. Many US and Western steel companies have complained China companies especially are "dumping" steel into their markets at below their cost to produce, and/or benefitting from a range of government subsidies.



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We will also note that a few years ago the contract for the steel to build a new bridge in the city of Oakland was awarded to a Chinese producer because no US company had the capacity to produce the steel in the quantities needed for the project.

And US employment in both steel and aluminum manufacturing has taken a beating – though not much different than most other sectors of US manufacturing. As shown in the chart below, US jobs in steel and aluminum have fallen steadily since 1990, and now employ just  about90,000 and 60,000 US workers, respectively.



The all-time peak employment in the steel industry was 650,000 in 1953.

Domestic steel companies in fact are likely expand production to alleviate supply shortages caused by the tariffs, most analysts are saying.

But as referenced above, the use of automation and other technology improvements means even if more steel production occurred in the US, it would be unlikely to generate a significant number of jobs.

Consider, for example, the story of Voestalpine AG’s steel plant in Austria. A Bloomberg News story from June 20, 2017 reported that the plant needs only14 employees to make 500,000 tons of steel wire per year. The same mill in the 1960s would have needed as many as 1,000 workers to produce a similar amount, albeit of lesser quality.

"We have to forget steel as a core employer," Voestalpine CEO Wolfgang Eder told Bloomberg. "In the long run we will lose most of the classic blue-collar workers, people doing the hot and dirty jobs in coking plants or around the blast furnaces. This will all be automated.

What's your opinion on these new tariffs? Let us know your thoughts at the Feedback section below.

 

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