Steel Firms Look to Capitalize on Tariffs—While They Can
- Keywords:
- tariffs
- steel
- steel prices
When I attended the annual Steel Success Strategies conference a few years ago, U.S. companies were fretting over low steel prices due to a glut of underpriced foreign imports. How times have changed. At this year’s conference, domestic concerns were buzzing about higher steel prices, which have largely been driven by tariffs.
In the short run, U.S. steel companies are in an excellent position. But the industry knows this is a temporary situation, and they’re exploring how to position themselves for the long term.
Good news, bad news
Tariffs from both trade cases and Section 232 tariffs/quotas on all steel imports, implemented through the World Trade Organization (“WTO”) during the Obama administration in 2016 and the implementation of Section 232 tariffs under President Donald Trump in April 2018, have sent steel prices skyrocketing over the past few years, and resulted in a protectionist environment in the steel industry. For example, in 2015, hot-rolled coil steel prices hit a low of $350 per ton. After hitting a multi-year high of $935 in June, prices gradually declined. The same effect has been realized on cold–rolled steel, galvanized steel and other steel products.
But higher prices are a double-edged sword. On the one hand, being able to charge higher prices means both increased profits and improved gross margins for domestic steel producers. Nucor, the largest U.S. steel producer, more than doubled its second quarter earnings from the same period last year. During 2018, some of the leading domestic steel companies experienced record profits,
with tariffs
being cited as one of the main factors. With strong earnings and cash flows, producers can reinvest in their businesses (i.e. purchase new equipment or expand operations), pay down debt, or become acquisitive. In addition, we’re seeing foreign companies invest in or expand into the U.S. market, which is creating jobs and gradually increasing the supply produced domestically. Many more foreign steel companies are exploring entrance into the U.S. market for fear they will be shut out of the U.S. steel market. The expansion of steel production in the U.S. is a long process that requires significant capital investment and time. However, the expansion has begun and should continue as long as tariffs or quotas remain in effect.
For companies that purchase steel, however, higher prices are a burden. Car manufacturers, for example, cannot pass all the costs of higher raw materials along to their customers and still remain competitive with foreign entities that are importing a finished product (which are not subject to import tariffs).
The long-term risk is that some companies will move some of their operations overseas as Harley-Davidson announced 
it would do earlier this year. Another option for users of steel is to expand operations overseas and ship a finished product to the U.S. to avoid tariffs. Right now, steel customers are waiting to see how the situation shakes out as many do not believe tariffs will remain in place for an extended period of time.
Preparing for a post-tariff world
Ultimately, steel companies know these tariffs will be temporary, particularly the ones Trump levied against Mexico, Canada and the EU under Section 232 of the Trade Expansion Act. That’s why they’re trying to maximize profits while they can. Based on what we’re seeing in the market:
- M&A activity has increased, as some companies explore selling while EBITDA levels are high, while others are considering acquisitions as a way to grow and expand.
- Many companies are taking the opportunity to hunker down and improve their operations so they can produce or distribute steel at a lower cost domestically, by investing in new equipment, as an example.
- Some companies that were overleveraged are paying down debt to improve their balance sheets.
Because the U.S. doesn’t produce as much metal as it consumes, there’s still raw material coming into the U.S., albeit at higher prices. Thanks to strength in the U.S. economy, demand for steel remains strong, so steel prices are holding firm.
On the other hand, the uncertainty of situation has made some overseas-based steel companies reluctant to ship steel to the U.S. That trepidation in the global market could adversely affect supply and demand. Long-term, more foreign companies entering the U.S. market means increased competition, which will drive prices lower.
With steel prices at near record levels, at some point, there’s going to be a ripple effect on the end market, which could lead to a drop in demand. Auto companies, for example, may decide to ship more finished product into the U.S.
These developments will probably happen gradually. For the next six months, we believe prices will likely remain flat to slightly lower. But at the end of the day, end customers will struggle with higher steel prices. A domestic car manufacturer is not going to continue to pay $900 a ton indefinitely.
That’s why steel companies aren’t just standing pat; they’re developing strategies that will allow them to thrive when the tariffs—and their related benefits—disappear.
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Andrew Pappas
Managing Director, Team Leader and Head of ABL Metals Group
Andrew is a Managing Director / Team Leader and Head of Asset Based Lending (ABL) Metals within the ABL Group of BMO Commercial Bank since 2011. Currently, Andrew o…(..)
View Full Profile >When I attended the annual Steel Success Strategies conference a few years ago, U.S. companies were fretting over low steel prices due to a glut of underpriced foreign imports. How times have changed. At this year’s conference, domestic concerns were buzzing about higher steel prices, which have largely been driven by tariffs.
In the short run, U.S. steel companies are in an excellent position. But the industry knows this is a temporary situation, and they’re exploring how to position themselves for the long term.
Good news, bad news
Tariffs from both trade cases and Section 232 tariffs/quotas on all steel imports, implemented through the World Trade Organization (“WTO”) during the Obama administration in 2016 and the implementation of Section 232 tariffs under President Donald Trump in April 2018, have sent steel prices skyrocketing over the past few years, and resulted in a protectionist environment in the steel industry. For example, in 2015, hot-rolled coil steel prices hit a low of $350 per ton. After hitting a multi-year high of $935 in June, prices gradually declined. The same effect has been realized on cold–rolled steel, galvanized steel and other steel products.
But higher prices are a double-edged sword. On the one hand, being able to charge higher prices means both increased profits and improved gross margins for domestic steel producers. Nucor, the largest U.S. steel producer, more than doubled its second quarter earnings from the same period last year. During 2018, some of the leading domestic steel companies experienced record profits, with tariffsbeing cited as one of the main factors. With strong earnings and cash flows, producers can reinvest in their businesses (i.e. purchase new equipment or expand operations), pay down debt, or become acquisitive. In addition, we’re seeing foreign companies invest in or expand into the U.S. market, which is creating jobs and gradually increasing the supply produced domestically. Many more foreign steel companies are exploring entrance into the U.S. market for fear they will be shut out of the U.S. steel market. The expansion of steel production in the U.S. is a long process that requires significant capital investment and time. However, the expansion has begun and should continue as long as tariffs or quotas remain in effect.
For companies that purchase steel, however, higher prices are a burden. Car manufacturers, for example, cannot pass all the costs of higher raw materials along to their customers and still remain competitive with foreign entities that are importing a finished product (which are not subject to import tariffs).
The long-term risk is that some companies will move some of their operations overseas as Harley-Davidson announced it would do earlier this year. Another option for users of steel is to expand operations overseas and ship a finished product to the U.S. to avoid tariffs. Right now, steel customers are waiting to see how the situation shakes out as many do not believe tariffs will remain in place for an extended period of time.
Preparing for a post-tariff world
Ultimately, steel companies know these tariffs will be temporary, particularly the ones Trump levied against Mexico, Canada and the EU under Section 232 of the Trade Expansion Act. That’s why they’re trying to maximize profits while they can. Based on what we’re seeing in the market:
- M&A activity has increased, as some companies explore selling while EBITDA levels are high, while others are considering acquisitions as a way to grow and expand.
- Many companies are taking the opportunity to hunker down and improve their operations so they can produce or distribute steel at a lower cost domestically, by investing in new equipment, as an example.
- Some companies that were overleveraged are paying down debt to improve their balance sheets.
Because the U.S. doesn’t produce as much metal as it consumes, there’s still raw material coming into the U.S., albeit at higher prices. Thanks to strength in the U.S. economy, demand for steel remains strong, so steel prices are holding firm.
On the other hand, the uncertainty of situation has made some overseas-based steel companies reluctant to ship steel to the U.S. That trepidation in the global market could adversely affect supply and demand. Long-term, more foreign companies entering the U.S. market means increased competition, which will drive prices lower.
With steel prices at near record levels, at some point, there’s going to be a ripple effect on the end market, which could lead to a drop in demand. Auto companies, for example, may decide to ship more finished product into the U.S.
These developments will probably happen gradually. For the next six months, we believe prices will likely remain flat to slightly lower. But at the end of the day, end customers will struggle with higher steel prices. A domestic car manufacturer is not going to continue to pay $900 a ton indefinitely.
That’s why steel companies aren’t just standing pat; they’re developing strategies that will allow them to thrive when the tariffs—and their related benefits—disappear.
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