Consider Costs of Steel Uncertainty, and Pass Them On?

Originally published by the following source: SBC MagazineApril 9, 2018

by TJ Jerke and Kirk Grundahl

Just over a month after the Trump Administration announced it was going to place tariffs on imported steel and aluminum, we are beginning to see bilateral agreements and renegotiated trade deals taking place.

With national security issues at the forefront of the US foreign policy negotiating agenda, it is important to have fair and reciprocal bilateral trade agreements such as steel tariffs, which have now encouraged countries to renegotiate various trade deals. This is an unprecedented approach that appears to be working very well for new negotiations on both the trade and foreign policy fronts.

While the tariff process is being implemented there is uncertainty. Whenever there is uncertainty in the market, it is easy to use it to make a case for higher costs, which are then passed on to users and consumers like component manufacturers (CMs).

Given this, it’s probably best to take a deep breath since what is taking place may be short term pain. Since negotiations continue to take place, it is very unclear what the actual steel supply and import duty will be in the long term. Hopefully, in the big picture of the US economy, the changes taking place, which have already led to lower taxes and improved economic growth will also provide long-term benefits for U.S. CMs even in the midst of a bit more raw material cost uncertainty.

The key to success will be for CMs to pass on all the higher costs – raw material, labor, trucking, etc. – like everyone else in the supply chain. The real question for CMs is: “what is an easy and reliable substitute for trusses?” Fortunately, not much.  Hence, it goes without saying that when CMs do not pass on cost increases they shortchange their businesses, as well as do great harm to the entire industry.

Many global partners have expressed their dismay towards the high tariffs, with China most recently announcing their own set of tariffs on U.S. goods. While the tariffs may not be working for China, they have helped bring others to the table. After the new steels tariffs were announced, the administration said it would allow countries to request an exemption from the tariffs until May 1, but they would have to deal directly with the U.S. in bilateral negotiations.

On March 28th, the US and Korea announced changes to the 2012 Republic of Korea Free Trade Agreement, which also included a country-wide exemption from the steel tariffs.

As part of the re-negotiated trade deal Korea will receive a two-year exemption from the 26 percent steel tariff, but the country is required to drop their steel export level to 70 percent of the total shipments from 2015-2017 and double the number of U.S. vehicles exported to Korea to 50,000 vehicles per U.S. manufacturer.

Other countries such as India are not only encouraging bilateral discussions on steel, but are investing in the U.S. economy.

India-based JSW Steel Ltd announced a $500 million investment in the companies’ two U.S. steel operations in Texas. Calling it, “backward integration” the company is going to take advantage of the fact they won’t have to import as much steel if they bring more steel production online in the U.S. Obviously, this is just the beginning of multiple negotiations taking place and there may be other exemptions put in place that we are unaware of. For instance, it just does not make sense that there is a quota and tariff placed on washing machines and then to take back all the competitive protections by placing a tariff on a key cost of goods sold – steel.

So, take a deep breath and try to avoid making decisions based on an emotional response. Watching, digesting and understanding the journey we are on will be an important ingredient to the success of every business in our industry, particularly CMs having the fortitude to pass on higher raw material costs as appropriate.

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