US Commerce Secretary Wilbur Ross defended the Section 232 steel and aluminum tariffs in a recent interview. Despite President Donald Trump’s steel tariffs, there’s been a flurry of plant closures followed by layoffs this year.
U.S. Steel Corporation (X), the once-iconic steel producer, was hit particularly hard. After curtailing two blast furnaces earlier this year, it announced a new round of curtailments last week. The company also expects to post negative EBITDA in the fourth quarter. So are Trump’s steel tariffs really working? Let’s explore.
Ross defends Trump’s steel tariffs
In an interview with Bloomberg, Ross defended President Trump’s steel and aluminum tariffs. For a little background, the tariffs were imposed last year after the US Department of Commerce flagged steel and aluminum imports as a national security threat under two separate investigations. The probe carried out under Section 232 of the Trade Expansion Act of 1962 gave President Trump wide-ranging powers to enforce tariffs.
Trump’s steel tariffs: 2018 was a rosy year
Through the tariffs, the US Commerce Department hoped to bring down imports and boost domestic production. It also aimed to lift the US steel industry’s capacity utilization level above 80% and revive investments in the steel and aluminum industry. Last year, we saw a lot of traction on all these fronts. The US steel industry’s capacity utilization rose above 80% for the first time since 2014. There were new plant announcements by Nucor and Steel Dynamics. U.S. Steel also restarted two blast furnaces at its Granite City facility. Century Aluminum also restarted its Hawesville smelter.
While President Trump visited U.S. Steel’s Granite City facility, Ross visited Century Aluminum’s Hawesville smelter. US steel companies’ earnings also surged, and Nucor and Steel Dynamics posted record earnings last year. Trump’s steel tariffs lifted US steel prices in the first half of 2018, propelling US steel companies’ earnings. But that was as good as it got.
2019: A year of despair for U.S. Steel
U.S. Steel continued its investment spree in 2019 and announced big investments in its plants. However, the markets weren’t impressed, and the focus shifted to plunging steel prices and expected cash burn. U.S. Steel is actually the worst-performing steel stock this year if we look at the top five US-based steel producers. US steel companies’ earnings peaked in the third quarter of 2018 and have since fallen sequentially in every quarter. Also, all leading steel stocks are trading below the price levels they were at when Trump announced the steel tariffs.
U.S. Steel’s fourth-quarter guidance
Last week, U.S. Steel released its fourth-quarter guidance and also announced curtailments and layoffs. Earlier this year, it also curtailed two blast furnaces in the US and one in Europe. The company expects to post negative EBITDA in the fourth quarter. This result would mark the first time it’s been EBITDA negative since the first quarter of 2016. While the US steel market has been weak this year, it’s still better than what we had in 2015. Read Dark Clouds Hover over US Steel despite Trump’s Tariffs for a detailed analysis of U.S. Steel’s fourth-quarter guidance.
Are Trump’s steel tariffs really working?
US steel production has fallen year-over-year for three consecutive months now. The industry’s capacity utilization ratio has also dipped—though it’s still slightly higher than the 80% threshold the Commerce Department was targeting. US steel imports have continued to fall, but there have been plant closures this year despite Trump’s steel tariffs.
In the interview, Ross pointed out that U.S. Steel is shutting down plants that have high-cost structures and that these are pretty old facilities. At the same time, the industry is investing in new ones. U.S. Steel is also spending billions on revamping its plants to better compete with minimills such as Nucor (NUE) and Steel Dynamics (STLD).
In my view, Trump’s steel tariffs helped achieve some of their objectives. US steel imports have fallen, and the fall looks structural rather than like a blip on the radar. While US steel production has fallen in the last few months, it’s largely due to tepid demand and the fact that domestic mills are streamlining production.
Incidentally, the fall in domestic steel production has helped prop up US steel prices. The investments that US steel companies have made in increasing capacity could lead to higher domestic production capacity in the next decade. However, it could also lead to the curtailment of some high-cost capacity.
AK Steel (AKS) also announced the permanent closure of its Ashland Works facility earlier this year. However, Cleveland-Cliffs (CLF), which announced the acquisition of AK Steel earlier this month, might use the facility to produce pig iron. If CLF goes ahead with the plan, it could also help in terms of import substitution, as currently, US steel mills mainly import pig iron.
Trump’s steel tariffs and the shift toward minimills
Overall, Trump’s tariffs have only hastened the structural shift toward electric arc furnaces, which have more variable cost structures that help companies survive in the cyclical steel industry. Also, as minimills add more capacity, it could lead to more domestic competition and result in structurally higher steel production in the US. But such churn has a flip side. In this case, it’s the shutting down of old and economically unviable blast furnaces.
It’s not that U.S. Steel hasn’t taken notice of the churn. It’s investing in plants that can help structurally improve the profitability of its blast furnaces. Also, the company has restarted the construction of its abandoned Fairfield electric arc furnace. It also took a stake in Big River Steel, which produces steel in a state-of-the-art electric arc furnace. Eventually, U.S. Steel intends to fully acquire Big River Steel.
US steel prices
While US steel prices have plunged over the last year, it’s been due to the global and domestic slowdown and not really Trump’s steel tariffs. With that said, however, Trump’s trade war has been one of the factors driving the global slowdown.
Coming back to Trump’s steel tariffs, neither is the US steel industry “thriving” after the tariffs as the president claimed earlier this year nor are the tariffs the sole reason behind the fall in US steel prices and recent layoffs. The truth, as always, lies somewhere in the middle. Read Have Trump’s Steel Tariffs Failed? for more analysis.