Bruce's Commentaries / 03.08.2018

Bruce’s Metal Market Commentary – March 2018

Bruce’s Metal Market Commentary – March 2018 - Image

President Trump has announced his intent to impose Section 232 tariffs: a sweeping 25% tariff on all imported steel and a 10% tariff on all prime and wrought aluminum imported from any country. Here are the pertinent facts as I see them: We import most of our steel from Canada, South Korea, and the EU, and 2% comes from China. Remember that 90% of our aluminum comes from Canada. The US cannot produce enough aluminum at any time to compete with that.

The steel industry capacity is running in the mid to upper 70’s and the mills are profitable. Since the Section 232 announcement, domestic mills and metal distributors have been raising their prices, which makes the companies less competitive because they will need to pass higher prices on to consumers. That gives foreign competitors an advantage on products they export to the US. Domestic aluminum and steel mills together employ 200,000 people, while steel-consuming manufacturers employ 6.5 million people.

Forecasts of the Section 232 effects are all over the board, so I am presenting some of the information that I have read. Overall lost manufacturing business will amount to between $12 billion and $45 billion, and job losses will be between 23,000 and 90,000This will take place two years after the tariffs are implemented. This will be offset by 1,900 new jobs at the steel and aluminum mills. Higher steel prices will lead some product manufacturers to substitute plastic for steel. Another forecast said that there will be very little change in prices for consumers, and the price of a car will go up by $175.

The biggest threat from Section 232 is that countries subject to the tariffs will likely retaliate. There are no winners in trade wars. Trump is getting a lot of pushback from Republicans and from states where jobs are threatened from proposed counter-tariffs, such as with Kentucky’s bourbon, Wisconsin’s Harley-Davidson motorcycles, and California’s Levi’s jeans. Every country ends up feeling pressure to retaliate and we never end up better in the long run than where we started.

What is next? Right now it appears that Trump will sign Section 232 quickly. How these tariffs will be implemented is anyone’s guess as everything is rapidly changing. As Secretary of Commerce Wilbur Ross said Sunday on “Meet the Press”: “What he has said, he has said. If he says something different, it will be something different.”

Economic data is a little softer. Nondefense capital goods orders, excluding aircraft, were down slightly in January after also being down in December. Durable goods were down .3% in January after being up .5% in December. The Producer Price Index was up .4% in January, but factory orders were flat. Car sales also fell to an annualized 17.1 million units. Housing starts were very strong. The ISM Manufacturing Index was up 1.7 percentage points to 60.8%, which is its highest point since May 2004. The Chicago PMI fell, but it is still very strong at over 60. The Atlanta Fed real-time GDP forecast for Q1 dropped to 2.6% from its point at over 4% last month.

China’s official manufacturing index fell but is still positive at over 50. The unofficial Caixin index rose slightly to 51.6 from 51.1. The Chinese New Year also affected February’s results.

Prime and scrap prices remain mostly flat. Spot LME aluminum has been falling this year, but the Midwest premium has been increasing. This is mostly due to Section 232 speculation. The actual spot price at the beginning of each month this year has been the same $1.12 per pound. Prime scrap prices fell this month due to lower mill demand, but secondary scrap rose because of weather-related supply changes. Stainless steel prices were also slightly higher. Steel prices will be a little higher. Copper and nickel are about the same.

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