Highlights

  • A 25% tariff on all imports of steel products has been imposed by the USA, effective from 23 March 2018. Canada, Mexico and the EU were temporarily exempted but the exemption was lifted as from 1 June
  • The impact of the tariffs on the value of global steel exports is expected to be restrained.
  • In the short term, the most affected regions should be the other NAFTA countries (although the announced retaliation tariffs on some US steel products imports should mitigate the average impact on the sector) and Central/South America & the Caribbean
  • The EU and Southeast Asia & Oceania should be more affected by the indirect impact caused by the redirection of flows into their markets. However, this impact is likely to be mitigated by the existing anti-dumping measures on specific countries and products
  • Even if the measure means downward pressure on international steel prices, this should not result in a significant price drop.

US tariffs likely to impact producers from other NAFTA countries as well as Central and South America and the Caribbean the most

On 8 March, US President Donald Trump signed off two recommendations from the US Department of Commerce, namely a 10% tariff on all imports of aluminium products and a 25% tariff on all imports of steel products. The measure took effect on 23 March, with some key countries (Canada, Mexico, the EU countries, South Korea, Argentina, Australia and Brazil) then temporarily exempted from the measure. An agreement avoiding tariffs, subject to quotas, was settled with South Korea at the end of March in the framework of the revision of the free trade agreement. Permanent exemptions have been granted to Argentina, Australia and Brazil from tariffs on steel imports, and to Argentina and Australia from tariffs on aluminium imports. Steel tariffs for Argentina and Brazil will be replaced by product-specific quotas on steel imports, and aluminium tariffs for Argentina will be replaced by quotas on imports1. Temporary exemptions were eventually also scrapped for Canada, Mexico and the EU and customs duties became effective as from 1 June on their exports to the USA. The US objective of these new duties is to increase the US aluminium and steel industries’ capacity utilisation rate from the current 73% to 80% in order to ensure the viability of these industries, which are said to be vital for US national security.

This Risk Insight analyses the potential impact of these measures on the steel sector. The assessment is made first at global level in order to provide a hint of the future evolution of international prices, and then at the level of the world regions, as these measures could have significant impacts on international markets and trade. The regional impact of the announced US tariffs on steel products could be both direct and indirect. The direct impact concerns countries which largely export to the USA and for which exports represent a large share of total production. The indirect impact considers the potential redirection of exports resulting from the loss of the US market2.

Consequences of the tariffs on the global supply-demand balance and price forecast

In 2017, steel prices increased due to stronger global economic growth, continuing strong demand from China (its share of world steel consumption is about 50%) as well as China’s willingness to reduce its metal production and pollution and shut down illegal steel production capacities. Previous protectionist measures taken in Europe and the USA against Chinese and Russian steel also contributed to the global steel price increase.
The international steel trade flows are well distributed. Indeed, the USA is the world’s second biggest iron and steel importer (7.3% in 2016 in USD), close behind Germany (7.5%). The total value of iron and steel exports to the USA in 2016 amounted to USD 22.5 bn. Canada is by far the largest iron and steel exporter to the USA (19% of US iron and steel imports in 2016 in USD), followed by Brazil, South Korea and Mexico (cf. graph 1). Taken together, EU countries account for 20% of iron and steel imports into the USA. The biggest region supplying steel to the USA is Southeast Asia and Oceania (26% – mainly from South Korea, Japan, Taiwan, China and Vietnam).

Since the USA accounts for a rather limited percentage of global steel exports and not all exports to the country will be lost, the value of lost global exports is expected to be restrained. On the positive side, global steel demand is expected to continue to increase by 1.8% (in volume) in 2018 and 0.7% in 2019, according to the World Steel Association. In this context, even if the 25% tariff definitely puts downward pressure on the global steel price, it should not result in a significant price drop. US steel prices are already much higher than prices in most countries and the discrepancy is expected to accentuate, similar to what has already been the case since US tariffs were implemented for most origin countries last March (cf. graph 3; HR coil prices are taken as a proxy for steel price evolution)3

Which regions might be most directly impacted?

According to data from UN Comtrade, the region with the largest share of iron and steel exports going to the USA out of its total exports is NAFTA (excluding the USA) (79% in 2016 in USD), followed by Central and South America & the Caribbean (26%) and Africa as well as “Central and Eastern Europe & the CIS”4 (both 9%).

It is also important to assess the significance of the exports (including re-exports) with respect to sector production per country. Exports (in USD) from countries from the regions “Advanced Europe”5 and “Central and Eastern Europe & the CIS” represented more than 50% of their iron and steel production in 2016.

The global dependence on US exports by region is summarised in the chart below, which indicates that NAFTA (excluding the USA) is the region that relies the most on exports to the USA. From a regional perspective, there is no other “obvious” region that should be severely hurt. While countries in Central/South America and the Caribbean have more than 25% of their total exports in the sector going to the USA, less than 20% of their iron and steel production is exported, mitigating the impact of the tariffs. Countries from the regions “Advanced Europe” and “Central and Eastern Europe & the CIS” export a significant share of their production but less than 10% of those exports go to the USA.

An “indirect impact” could materialise owing to the fact that countries exporting steel to the USA will now have to find other markets to sell their surplus (resulting from the loss of the US market). It is assumed that, first of all, countries will most likely export their surplus to markets with which they already have strong distribution channels. This would put additional (indirect) pressure on those markets.

To assess the possible future changes in steel trade flows, the biggest iron and steel suppliers to the USA are selected, as those are the sources of additional flows. As already mentioned, those suppliers are the EU28 (20%), Canada (19% of US iron and steel imports), Brazil (10%), South Korea (8%) and Mexico (6%)6.

The table below shows that Advanced Europe represents the first or second biggest export market for the large exporters to the USA (without considering Canada and Mexico). Given that those suppliers will probably primarily use their existing distribution channels to sell their surplus in the short term, Advanced Europe is expected to become a more important destination for iron and steel exports, probably firstly from its own country members. However, China (mainly), South Korea and Brazil (among others) are already targeted by anti-dumping duties on certain types of steel and stainless steel products (e.g. cold-rolled flat steel, corrosion-resistant steel and other hot-rolled steel products). This should soften the impact of additional cheap steel flooding the European market.

Southeast Asia and Oceania is also an important destination for those countries, in particular South Korea. There is a renewed risk of oversupply in the region given that 64% of Chinese exports are already heading that way.

Other Latin American countries which export a large share to the USA will also probably look for new markets in Europe and in Southeast Asia.

Conclusion

The steel industry is expected to be shaken by the US tariffs, but seemingly only to a moderate extent. Steel prices are expected to be under downward pressure as a result of the measure, although this should not mean a significant drop in steel prices. On the contrary, they should remain elevated over the next two to three years in the USA. The most directly negatively impacted countries should be the ones with a large share of exports going to the USA. As a result, Canada and Mexico would be largely affected by the implementation of the US steel tariffs, although announced retaliation measures in the form of tariffs on US imports on steel products should mitigate the average impact on the sector. Countries from “Central and South America & the Caribbean” should also be hurt, although to a lesser extent. In particular, Brazil, depending on the extent of the quotas authorised, should be significantly affected since an important share of its exports goes to the USA.

Another probable consequence of these tariffs is that they will reshape the international steel trade flows as lost exports to the USA will have to be redirected to other markets. This is expected to be at the expense of European countries and Southeast Asia, although this would be partly mitigated by the existing anti-dumping/protectionist measures on specific countries and products.

Analysts: Matthieu Depreter – M.Depreter@credendo.com and Florence Thiéry – F.Thiery@credendo.com


1 Alternative arrangements for Australia are not yet known.
2 The imposition of quotas in return for permanent exemption from tariffs for some countries would also mean loss of revenue for exporters and redirection of volumes, like tariffs.
3 Similar trends are observed for the CR coil and rebar prices.
4 “Central and Eastern Europe & the CIS” includes the CIS countries, Turkey, Albania, Bosnia and Herzegovina, Kosovo, Macedonia, Montenegro and Serbia.
5 “Advanced Europe” includes all EU countries, Iceland, Norway and Switzerland.
6 Brazil accounts for 82% of exports from Central/South America & the Caribbean to the USA; South Korea accounts for 31% of Asian exports.