Life is good for the steel industry. The economy is thriving, end markets are growing and business is booming. Despite these positive indicators, steel insiders can’t help but feel a certain amount of uncertainty about the future.
Finding the source of this uncertainty, whether from the precarious state of NAFTA or the ongoing impacts of Section 232, was the main objective of Steel Market Update’s eighth annual Steel Summit, held Aug. 27-29 in Atlanta. The theme of the three-day conference was “Making Sense Out of the Chaos,” and economist Keith Prather said this is an apt description not only for the steel industry, but the economy as a whole.
“For the first time in 13 years, we’re experiencing a growth rate in the economy that’s over 3 percent,” he said during his keynote presentation. “That sounds great, but right now brings a whole new set of challenges. You have challenges finding raw materials, challenges finding labor, your customers are struggling, your suppliers are struggling; it’s a completely different set of problems, but they’re problems nonetheless.”Prather, who is the managing director at Armada Corporate Intelligence, noted the economy had a great first half of the year, wrapping up the second quarter with a 4.1 percent growth rate. Furthermore, forecasted growth rates for the third and fourth quarters are 3 percent and 2.9 percent, respectively.
“So, growth rates look good. All the mechanics in the economy seem to be feeling pretty good on a global basis, growth is still pretty steady, but there are some things that could derail it,” Prather said.
Referencing a recent report from investment research firm FactSet, Prather discussed what U.S. CEOs reported was on their “wall of worry” at the end of the second quarter. “The wall of worry just simply says that generally we feel good, economic conditions are good, but there are these things we’re a little concerned about,” he explained. “Those are the things that could derail growth, and so we worry about them a little bit.”
These potential pitfalls for the economy include currency fluctuations, raw material costs and general inflation, transportation and freight costs, oil and gas prices, and wage and labor costs. “They were most worried about dollar and currency fluctuations, and they were really worried about what’s happening on the raw material cost side and general inflation,” Prather said.
NAFTA talks loom over Steel Summit
On the first day of the conference, the Trump administration announced that the U.S. and Mexico had reached a new trade deal. The news, which puts the future of NAFTA into question, was rightfully on the minds of many Steel Summit attendees and speakers.
The 24-year-old trade agreement has benefitted the domestic steel industry, according to Steel Manufacturers Association President Philip Bell, who outlined the importance of NAFTA to U.S. steelmakers, the risks of ending NAFTA and the changes his organization would like to see made to the longtime trade agreement.
“Our position on NAFTA is very straightforward,” Bell explained. “NAFTA has been a net positive for North American steel producers. We also think it should be a high priority to strengthen and maintain NAFTA. We don’t think NAFTA should be blown up. We don’t think we should get out of it. The goal of NAFTA has been, and it’s done this successfully, to increase North American steel consumption through the growth of North American steel supply chains.”
Since it went into place in 1994, intra-NAFTA steel trade has increased tremendously. From 1995 to 2017, the amount of steel traded with other NAFTA countries increased 167 percent in the U.S., 32 percent in Mexico and 48 percent in Canada.
Currently, NAFTA remains the largest market for each country’s steel exports, with 97 percent of Canadian steel exports going to the U.S. and Mexico in 2017, 88 percent of U.S. steel exports going to Canada and Mexico, and 77 percent of Mexican steel exports going to the U.S. and Canada.
“You’ve got to understand that NAFTA remains the largest market for steel exports for the U.S., Mexico and Canada,” Bell said. “Again, this underscores the significance of this relationship, the integrated supply chains, cross-border ownership, the millions and millions of dollars and tons of raw material and semi-finished products that cross the borders every single day.”
If NAFTA were to end, Bell said the U.S. would lose duty-free shipments of steel imports into Mexico, and North American steel exports not covered by a foreign trade agreement with Mexico would be disadvantaged compared to steel from the EU, Japan and other Mexican FTA partners. Additionally, duties on steel-consuming industries would come back into force, affecting supply chains in North America. The impact of this could prompt auto producers to move production to Asia, disrupt growth in North American energy markets served by steel, lower investment, reduce U.S. economic growth and increase costs for consumers.
“We think NAFTA has been a good thing,” Bell said. “But like anything that’s almost a quarter of a century old, you need to take a look at it, revisit it, reassess it, rework it, modernize it and make it better.”
SMA’s position is that NAFTA should serve to increase U.S. and North American steel content in manufacturing sectors. NAFTA and other foreign trade agreements should not allow “free riders” to take advantage of duty-free treatment, and that the current agreement has not done enough to prevent erosion of North American content in the auto sector.
To that end, Bell listed several goals that SMA would like NAFTA modernization talks to accomplish. These include strengthening rules of origin to incentivize the use of North American steel, particularly in auto; promoting trade enforcement cooperation and coordination; disciplining trade-distorting currency manipulation among partners within foreign trade agreements; establishing disciplines on state-owned enterprises; and improving customs procedures and upgrading border infrastructure in order to make trade more efficient.
“I think what’s important is that we’ve got to work together – the steel industry, as well as government – and we’ve got to focus on excess global capacity,” Bell concluded. “The only way we’re going to deal with the really big problems is for us to work together as a trading bloc and not work against each other or to try to take advantage of each other.”
During the conference, attendees were asked to share their opinions on Section 232 and its impacts on their business. The poll, which had 486 responses, showed that a slight majority of respondents were not in favor of the tariffs.
Forty-nine percent of respondents said the tariffs have had a negative impact on their business, 43 percent said Section 232 has had a positive impact on their business and 8 percent said the tariffs have had no impact on their business.
When asked about the poll results, Nucor Chairman, CEO and President John Ferriola said he was shocked. “It surprises me that you have so many saying it’s had a negative impact on their business,” he said. “You see a lot in the press about the steel companies and the tremendous profits that they’re making, but there are a lot of other companies that are also doing well in this environment.”
Ferriola even pointed to Steel Summit’s record-high attendance of 912 people as proof the industry is thriving post Section 232. “You have a record turnout at this conference,” he said. “That’s because the economy is doing well; the industry is doing well. Life is good. Let’s all enjoy it.”
In a separate conference session, Christopher Shipp, who is the vice president of Priefert Manufacturing and Priefert Steel, offered an alternative view of the impact of Section 232 on the industry. The Mount Pleasant, Texas-based steel service center and manufacturer of farm, ranch and rodeo equipment has struggled to pass price increases onto its customers.
“As we’ve entered into 2018, one of our challenges has been the rapid increase in the price of steel,” Shipp said. “It is very difficult to pass on a lot of these significant, rapidly increasing costs to our end-use customers… The value of our product gets to a point where the consumer says, ‘It’s not worth it. We’re going to wait.’”
Priefert has implemented four price increases in the past 12 months, according to Shipp, who notes that the company had previously not passed more than one price increase per year in any of the more than 50 years that it has been in business.
In his opinion, the steel tariffs have weakened the U.S. by protecting jobs in less-efficient industries, while preventing job growth in steel manufacturing. Shipp added that the normal trade case resolution process was working prior to the implementation of the tariffs.
“We have not agreed with the Section 232 process,” he said. “We really feel like we’re starting to sacrifice downstream industries to support upstream industries… These aren’t multibillion-dollar companies I’m talking about. These are 30- and 40-employee companies that cannot pass those price increases on that fast to their end-product consumer. That’s tough for small manufacturers to deal with day in and day out.”
From Ferriola’s perspective, the goal of the tariffs has been achieved. “I believe what they set out to accomplish was to stem the tide, the flow, the tsunami, of illegally traded products and to level the playing field in which American steel companies can compete. I think they’ve accomplished that.”