Buyers say steel tariffs could derail manufacturing rally

August 11, 2010

President Bush's announcement that the U.S. will impose tariffs ranging from 8 to 30 percent on 10 different steel mill product imports has triggered a storm of criticism from steel buyers. Buyers overwhelmingly believe tariffs on steel imports could short-circuit the manufacturing recovery, raise raw materials costs, and tighten supply artificially.

Buyers are especially angry about the immediate - and high - price increases being announced by domestic mills, which they have portrayed as 'opportunistic,' 'inefficient' and 'in need of immediate restructuring.' Some buyers say they will be investigating purchases of offshore steel-containing parts, replacement of steel with alternative materials, and even the transfer of steel sourcing to divisions or subsidiaries in Canada and Mexico (two countries where mills have been excused from punitive tariffs).

Sixty-three percent of buyers responding to an online Purchasing survey believe both their company and other manufacturing firms will be harmed financially this year by tariffs on imported steel. Only 27 percent say their firms will experience no financial distress and 10 percent are unsure. The majority agree with a Kansas-based buyer, who says: 'The tariffs are bound to have a negative effect on the entire manufacturing sector because already-narrow profit margins will be reduced further since metalworking companies will have trouble passing increased steel costs onto their customers.'

Calling the imposition of tariffs 'shortsighted,' steel buyers suggest that quotas would have been a much better alternative. Just the threat of tariffs during the government's lengthy Section 201 investigation reduced foreign supply by 21 percent last year. Analysts project another 16 percent reduction in imports this year. So buyers say the tariffs, which were scheduled to go into effect March 20, are tightening new-steel supply artificially and threatening numerous existing contracts.

Atop that, domestic steel mills have begun announcing a series of substantial price increases for future deliveries. Hikes being sought by the mills would take the price of bellwether grade hot-rolled steel sheet from $240/ton in this month's spot market to $280-$300 in the second quarter, $320-$340 in the third quarter, and $360-$380 in the fourth quarter. By comparison, hot-rolled sheet averaged $227/ton in 2001. Buyers complain that mills may be hoarding steel, moderating production, and limiting new-order bookings to boost future-delivery prices of hot-rolled, cold-rolled and coated sheets.

The steel buyer for a steel drum manufacturing company in Ohio says: 'We will be harmed due to the sheer timing of the steel increases and by our lack of ability to pass along some of these increases to customers. The timing and sheer volume of these increases is too much for us and for the economy to handle.'

A Brookings Institution study estimates that the highest price increases for manufactured products caused by higher steel prices will come in materials handling equipment, farm construction and mining machinery. However, responses to Purchasing's online survey and accompanying commentaries from buyers concerned about higher steel prices come from manufacturing segments of all stripes. Steel buyers dismiss as 'uninformed' the estimates from pro-tariff economists and analysts suggesting that cost increases in manufacturing will likely run from just 0.3 percent to 1 percent due to higher steel prices.

'The tariffs will have a substantial impact on our costs, but the degree of penalty will be known only after current inventories are exhausted and the tariffs become effective,' says the steel buyer for a maker of air movement and control equipment in Wisconsin.

The strategic commodities specialist at a Michigan producer of parts for the transportation industry adds: 'We cannot recover a 22 percent increase in steel from our customers. Over the past five years, we have been involved in 'give back' pricing on our products. These tariffs will evaporate our margins.' He says his firm will either have to raise prices substantially and make them stick or 'exit the business.'

Another issue galling buyers is that steel mills have extended delivery leadtimes well beyond those considered reasonable for just-in-time delivery in most steel-using manufacturing systems. 'Leadtimes being quoted are almost out into the third quarter, and this is only mid-March,' complains one steel buyer in Ohio. 'Obviously, the mills are trying to panic buyers into committing to third-quarter deliveries at prices that markets for our products simply can't support,' says the steel buyer for an Ohio-based automotive parts making plant.

'We will be harmed by the tariffs and the price increase,' says the steel buyer for an agricultural-buildings manufacturing plant in Indiana. 'We will be forced to pay the large increases to domestic mills, due to reduced availability of imports, which will affect our margins.' He says delivery leadtimes already have shot out to June and July for galvanized sheet. 'And the mills are reneging on contracts and imposing 10% price increases on purchase orders already in the system for second quarter delivery.' Also, 'it looks like they're imposing additional 10% increases for third quarter deliveries,' he adds.

As a group, buyers are upset that the Bush administration 'yielded to a lot of political pressure' to support money-losing steel mills in key election-year states (Ohio and Pennsylvania), where many steel mills are located. One buyer says the trade action 'will cause more harm across manufacturing than the good it will do for the steel firms.' Besides tightening supplies of steel and raising prices, some buyers fret that retaliatory trade actions in other countries will reduce their companies' exports of manufactured products.

The steel buyer at a Georgia processing plant suggests, 'There are too many 'ifs' in the domestic market' to gauge the impact of tariffs just yet. 'We don't know,' he says, 'if our demand will support price increases, if domestic mills with overcapacity will trim production to order levels, if (or when) importers will find their way around tariffs, or if market competition will cause some mills to continue selling at lower prices to generate cash.'

'The damage to manufacturing from tariffs already has begun,' says the purchasing manager for a producer of stamped panels and modules for automakers. 'Steel shortages and increased pricing will hurt our production and our cost-control programs.' He adds: 'I doubt Mr. Bush will bail out my industry when my Tier I automotive supplier company dies, but he can protect a materials industry that doesn't reinvest to modernize and become competitive globally.' He ends his comments: 'Where do I stand in line for a hand-out?'

The buyer at a fabrication plant in Pennsylvania says that 'more finished parts will be sourced offshore to avoid tariffs and higher domestic prices.' In fact, some buyers are looking globally for new supply, contacting steel parts makers in Canada, Mexico and overseas to avoid paying for the higher-priced components that are sure to be coming from their domestic suppliers.

'We will be hurt if we pay our stampers what they are charging because their steel costs are rising,' says the purchasing manager for an automotive parts company in Michigan. 'We now are evaluating what savings could be regained by going off shore for our metal stampings,' he says. Similar comments come from a buyer at a plant that buys tinplate for metal can ends, a buyer for a machinery parts maker in Illinois, and a buyer for a computer maker in California. 'These tariffs will lead to more of my parts purchasing heading to Mexico or to China,' says the purchasing director of an industrial equipment manufacturer in Pennsylvania.

         
 

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