Instead of talking about political activism—because I think I would to lose you after you read the first paragraph—let’s talk about steel prices, which should grab the attention of any metal fabrication business.
Would you be able to absorb higher material costs into your business without it significantly affecting your overall business?
I’m betting not. That’s why you should be concerned about the potential for steel prices to spike to levels not seen in many years.
On April 20 the Trump administration enacted a Section 232 (of the Trade Expansion Act of 1962) investigation to determine if imports of steel products represent a threat to national security. The U.S. Department of Commerce leads the investigation, and the secretary is supposed to deliver findings, and potential remedies if needed, to the president within 270 days of when President Trump signed the memorandum that announced the start of the investigation.
The steel industry met the news with enthusiasm. Traditional steelmakers, such as U.S. Steel, led the parade as many of these companies have enjoyed few profitable years in recent memory. Because their mills convert raw ingredients such as iron ore, limestone, and coke into steel products, they have high fixed costs, and they have really been hurt by steel imports. According to the American Iron and Steel Institute (AISI), imports commanded 26 percent of U.S. market share through April. Implementation of multiple tariffs and duties over the past couple of years has helped to drive that down from 29 percent in 2016. The mini-mill segment, led by Nucor Corp., relies on electric arc furnaces to melt steel scrap into a molten state to create steel products. Because it has a much lower cost structure when compared to the more traditional integrated mills, it has performed more profitably over the past several years. In fact, Nucor reported its largest quarterly profit since 2008 in April. That still doesn’t stop it from claiming that it too is being harmed by imported steel.
Many metal fabricators probably didn’t notice the news, although they may be aware of rising prices. In the first-quarter “Forming & Fabricating Job Shop Consumption Report” from the Fabricators & Manufacturers Association (FMA), 59.4 percent of those surveyed reported that raw material prices were going up, and 39.8 percent said the prices were staying right where they have been.
They should be taking note, however. According to FMA’s 2016 “Financial Ratios and Operational Benchmarking Survey,” 61 percent of metal fabricating companies surveyed reported that direct material costs represent anywhere from 30 percent to 64 percent of overall sales.
U.S. OEMs and metal fabricators already pay some of the highest prices for steel. A leading steel market newsletter suggests that U.S. manufacturers pay about about 81 percent more for hot-rolled steel and 92 percent more for cold-rolled steel than Chinese-based companies. On average, U.S. companies pay about 40 percent more than their counterparts elsewhere in the world.
The Section 232 investigation may result in further restrictions on foreign steel supply, which will cause further steel price increases. Fabricators not familiar with current steel prices should keep in mind that in March the index price for cold-rolled steel was the highest it had been in about six years. The potential for prices to increase to levels not seen in a decade is real. Given that some fabricators are locked into price-fixed contracts with large OEMs or simply have no wiggle room when it comes to pricing with their customers, any large increase in raw material prices could prove to be devastating to an economic segment that, frankly, has a much greater impact on the health of the overall U.S. economy than other segments have. AISI estimates that the U.S. steel industry employs 140,000 people; the Manufacturing Extension Partnership reports that 58,000 U.S. manufacturers of fabricated metal products, which is only one of the metal manufacturing segments identified by the North American Industry Classification System, employs 1.4 million, about 13 percent of all direct manufacturing jobs.
With the steel industry currently operating successfully—even U.S. Steel is expected to post a profit in 2017—and the U.S. able to impose penalties when it believes dumping is occurring, as it did in 2016, is this type of review really necessary? Is it worth the risk of shaking up a very important segment of the U.S. economy when everything is lining up for a real economic rebound for which people have been waiting for years?