Steel Industry Update

Ben O'DellSteel Industry

The US Economy, under Donald Trump, has continued increasing in step with growth that began under the Obama administration. Since the dramatic loss of jobs and shrinking of the economy in 2009, there has been a relatively steadily increase in jobs totaling roughly 12 million jobs at the end of 2016. Under Trump, the economy gained an additional 1.7 million jobs during 2017. Consequently, the steel industry has been growing and is continuing to grow (Washington Post). Recently, the steel industry is experiencing somewhat of a “Perfect Storm” when it comes to steel prices going up. Demand is up and supply is down: but why?

The Perfect Storm Simplified

Derek Ross, salesman at Huntington Steel & Supply, did some research and simplified three facets of this “Perfect Storm.” First, Donald trump signed into law a 25% tariff on steel that has caused large amounts of fear buying. Current steel consumers are concerned about the future spike in steel prices and are thereby buying up what steel they can to prepare. Second, Ross explained that the automotive, construction, and mining industries are all rising in correlation with the institution of the Trump administration’s tax plan which is also increasing demand for steel. Third, the scarcity of truckers nationwide has also caused steel prices to increase because of the added demand and diminishing of supply in the shipping industry.

In the next section, these three facets of the “Perfect Storm” will be fleshed out in greater detail.

The Industries

On March 1st, President Trump, planning to further bolster the steel industry, announced a 25% tariff on steel imports in response to a trade deficit between the US and the rest of the world. The Office of Energy Efficiency and Renewable Energy states this: “Large quantities of low-cost imports have challenged the industry in recent years, but restructuring, downsizing, and widespread implementation of new technologies have led to vastly improved labor productivity, energy efficiency, and yield,” This seems to be something good, but it is indicative of the pervasiveness of the trade deficit. Following his announcement, the President tweeted, “Our Steel and Aluminum industries (and many others) have been decimated by decades of unfair trade and bad policy with countries from around the world. We must not let our country, companies and workers be taken advantage of any longer,” and he is right. It is clear that that the steel industry has been losing jobs and has been forced to downsize which is not good for the US economy. The goal of this tariff, then, is to shrink the trade deficit so the downsizing of steel companies can be reversed and industrial capacity in the United States will grow.

The Tariff


Auto

With the advent of the new GOP tax bill, the auto industry on the up and up. Business Insider, in an article titled “The GOP tax bill is a huge gift to the US auto industry,” predicted this upturn. This article quotes Jonathan Smoke, Chief Economist at Cox Automotive, saying, “The additional spending power that most households will have due to tax reform should result in a continued 'move up' in what consumers purchase,” (Business Insider).


Construction

In regard to the construction industry and the tax plan, Constructiondrive.com writes this: “The public construction sector will benefit from the uninterrupted flow of private-activity bond financing, and both the contractors who are structured as pass-through entities and C Corporations will see significant tax relief.” With this tax relief now being realized, construction industries have increased profits and have experienced growth (Construction Drive).


Mining

The mining industry was also projected to have seen a significant boost. Financial Times writes, “Without the bill, the average effective tax rate for the mining industry was expected to be about 16 per cent next year. If the bill passes, that will drop to just 7 per cent,” which allows mining companies to invest in themselves with new equipment, more jobs, and ultimately more production (Financial Times).


The Trucking Shortage

According to an article titled, “Trucking Industry Struggles With Growing Driver Shortage,” from National Public Radio, “The trucking industry needs to hire almost 900,000 more drivers to meet rising demand.” With more than 70 percent of US goods moved by truck, this low supply is forcing many companies to delay nonessential shipments and, in some cases, pay high-climbing prices for goods to arrive on time. For industries like steel that rely heavily on truckers, this high demand and low supply are continuing to drive prices up for the products themselves.


The Risk of the Perfect Storm

Initially, these elements of this “Perfect Storm” have been beneficial to the steel industry across the nation; however, there is much apprehension as to what the long-term effect will be. Ana Swanson of the New York Times details the possibility of a trade war. She writes, “Imposing tough sanctions would fulfill the president’s promises but could tip off trade wars around the world as other countries seek to retaliate against the United States. Foreign governments, multinational companies and the Pentagon have continued to push against broad tariffs, arguing that the measures could disrupt economic and security ties,” (New York Times).


In addition to the possibility of trade wars, Mike Emerson, CEO of Huntington Steel and Supply, says this, “The fear… is that steel will price itself so high that people will choose some other product such as concrete, wood instead.” As such, the steel industry could suffer from the heighted prices.

So Where are We Now?

That is the question. Currently, the steel industry prices have gone up, but not much higher than recent history. According to reuters.com, China has imposed several retaliatory tariffs, but they have been smaller tariffs that remain largely ineffectual to the US (Reuters).

Regarding the fear of industries moving away from steel, CEO Dan Emerson said this: “The truth of the matter is steel prices decreased . . . in ‘17, and now they have just gotten up to where they were really at the end of ‘16, it is not a real fear. I don’t think [the fear] is valid although it is a shock right now. . . but it will settle down and we’re going to get a plateau in steel pricing.”

All in all, steel prices are up, but there is little to be worried about as the industry moves forward.