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Section Two Thirty-What Now?

April 30th, 2018 by Mike Meyerhoff

I have to assume that if you are reading this that means you work in or at the very least have some marginal interest in the steel industry.  Perhaps you are a steel trader, or maybe manage a company which uses steel to fabricate or manufacture a product. You may be a buyer for a small machine shop, a utility worker at a steel mill, or an owner-operator long hauler.  My point here is that no matter where you are in the chain – from producer to consumer to innocent bystander – what has been happening with regard to steel prices has probably affected you or your business…if not at least caught your attention.  The purpose of this blog is to hopefully simplify what many will argue is a major culprit behind the recent steel pricing volatility…you may have heard of it: Section 232.

Let me start by making clear that I’m not an economist.  I’m not a trade policy historian and I’m certainly not taking position on this matter (largely because I’m not sure what side of the fence I’m on here).  I am just a salesman in the steel pipe business who has access to Google after his kids go to bed with a heart of gold who decided to look all this stuff up for you.  

You may not think it, but steel is a relatively volatile commodity.  In our corner of the industry we see pricing swings of 20 – 30 % or so in roughly 3 year cycles, and that’s not considering the super fun random geopolitical or even weather events which can cause huge spikes one way or the other.  Recall the polar vortex in 2014…prices on some items shot up 20% overnight as shipping lanes were closed and distributor’s forklifts froze up (ahhhh…the winter I learned how to thaw out diesel fuel lines the hard way). And when oil tanked in the back half of 2014, many steel distributors saw the values of their inventory cut in half over the course of one quarter.  But now that we have global warming and peace in the middle east, what could possibly be driving these crazy spikes in pricing, right? Well since this blog is about Section 232, we’re going to say that it’s all about this Section 232…specifically the tariffs, or the threat of tariffs, or even the threat of maybe a threat of some kind of tariff which a Section 232 investigation could impose on steel goods…dig we now deeper.

So when you hear people talking about this Section 232, what they’re referring to is Section 232 of the Trade Expansion Act of 1962.   This section of this law authorizes the Secretary of Commerce to conduct investigations as to whether the effects of any imported good threaten our national security.  Specifically these investigations must consider:

  • Domestic production needed for national defense requirements
    • Domestic industry’s capacity to meet those requirements
  • Related human and material resources
  • The importation of goods in terms of their quantities and use
  • The close relation of national economic welfare to US national security
  • Loss of skills or investment, substantial unemployment and decrease in government revenue
  • The impact of foreign competition on specific domestic industries and the impact of displacement of any domestic products by excessive imports

 

The Secretary of Commerce has to get with the Secretary of Defense regarding these investigations and when these two guys determine that something we import, per the considerations above, does threaten our national security, they report as much to the President who then can then put tariffs on those goods without having to go through Congress…specifically the President may, “adjust the imports of an article and its derivatives”.  So let’s say that our military exclusively used bullets made out of bubble gum  We have bubble gum factories here which make and sell bubble gum to our military.  But one day Jamaica figures out how to make bubble gum REALLY cheap and they start exporting it to the US.  This new super cheap bubble gum is so cheap that it drives all the US bubble gum makers out of business and now our military has to completely rely on importing all its bubble gum or possibly being left with having no ammo.  We’re then one bad Bob Marley cover band away from Jamaica successfully invading America…thank heavens for Section 232!  As a bit of a side note, the reasoning behind the passing of the Expansion Act of ’62 was  actually to allow the President to CUT tariffs without having to wait for Congress who were (it was argued) too tied to special interest groups to get much done on the matter.  Specifically, the idea was that this quicker tariff cutting mechanism would help developing countries (like Vietnam and Panama) become more economically stable so they would be buddies with us…cant win em all I suppose.

The situation with the current Section 232 investigation on imported steel goods is a little less vulgar than my bubble gum analogy, but I submit that its actually not that far off.  There is vast consensus opinion that the flood of cheap steel from overseas has significantly impacted our market as well as the markets which the greater steel market supports. US steel dealers buy and sell (and thus set the domestic steel market prices) based on the cost of cheaper imported steel goods.  A lot of people think this is just how a healthy world market operates. A lot of people also think that these imports are so cheap because these exporting countries are cheating (via unfair wages/conditions for workers, currency manipulation, etc). It’s the old FAIR TRADE versus FREE TRADE debate which goes way beyond the scope of this post.

So now how would any of this affect national security  to the point where the President can use this Section 232 and circumvent congress?  The prevailing logic suggests that if our steel market becomes too dependent on foreign steel as a basis of cost and material, then our domestic output capacity will be lowered to the point where we either do not have enough steel to meet our national defense needs in the event that we are cut off, or that the cost of our domestic production will be so disproportionately higher to that of imports that we bite our note to spite our face in an economic sense and thus become economically vulnerable.  Workers with jobs in the steel industry, as well as all the workers constructing buildings or working for or with fabricators, OEMs, or manufacturers, will see declining wadges and loss of jobs as domestic builders and makers of things are underbid by importers and/or cut overhead in an attempt to be economically viable.  Those projects  required to use domestic steel cost disproportionately more compared to relative imports, and those inflated costs get passed down to we the consumers…all coming together to create a downward economic spiral which ultimately leaves we as a country vulnerable to any number of national defense concerns (hearken Germany and Russia circa 1915 – 1930).

Now to bring this around full circle, and to put things in the context of today’s US steel market, as steel dealers we are fairly unsure what is happening with this Section 232 investigation.  We can make strategy about how and when to buy or sell product relative to market conditions, but when we have this major question mark hanging over our heads; when we don’t know whether this Section 232 investigation will impose RETROACTIVE TARIFFS of up to and maybe more than 25% on imports, it makes it VERY hard for any of us to take on any serious levels of inventory so we hold on to what we have and sell it at a very high price because we won’t be buying as much replacement stock.  At the same time a lot of the mills are also unsure of the future so they too are keeping inventories lean. The longer this investigation goes, the more uncertain we all are and the more volatile our price points become.

At the end of the day however this is business and if we didn’t at least derive some level of enjoyment from this craziness then I’d say we picked the wrong profession.  Somehow our predecessors managed to keep our industry alive for 180 some-odd years, and so if they can do it we will do it!