Encouraging 232 Developments
As I have been very critical of the seemingly overreaching Section 232 action on Steel, I read some encouraging news that is important to share. According do the US Trade Representative, the Section 232 tariffs are being delayed for countries currently negotiating exemptions. As reported by the American Metal Market, those temporarily exempted countries include the European Union, Argentina, Australia, Brazil and South Korea.
These currently exempted countries, along with Canada and Mexico, account for greater than 50% of our steel imported to the US annually, and in-kind more than 15% of our overall steel consumption. Noticeably absent from this list is Japan, which is a source of high tech steels used in a variety of industries.
In discussions with market participants, I have recently heard of 35% price increases from distributors on various grades of steel, and a datapoint of 25% increase on tool steel that is made in Germany. With this latest news, what will distributors do? Will they scale back those announced price increases, as their savvy customers know the origin of the material they buy?
In the meantime, and even if steelmakers and steel distributors do not scale back on these price increases, those in the steel industry are experiencing high margins, at a level we have not seen in years.
Scrap has been the primary driver of steel prices in the US for decades. Year to date, the price of steel is up 30% but the price of steel scrap is up less than 10%. So what is driving the price increases?
- Tax Increases? No
- Wages? No
- Natural Gas? No
- Electricity? No
Its difficult to point the price increases to anything other than the Section 232 hype machine, on top of the protectionist agenda that has been raising steel prices since November 2016.
How do you push back on these price increases? It is time to be opportunistic. There is certainly a steel distributor somewhere, who is will to move their inventory at a more modest price increase than those who are aggressively going to the 25-35% price increase range described above. Go back to your vendor and talk through the increases and the rationale above, regarding the origin of the material. If they are a good vendor and a real partner, they should come to the table and find some compromise on these price increases. After all, this is why we develop relationships with vendors and not just treat them like a number to be replaced as soon as there is a lower price elsewhere.