Reaching a tipping point in volume, steel imports face the weight of politics

September 2014 - Steel consumers nearly always have choices when sourcing material. Some would argue those choices become limited when foreign material is burdened with tariffs designed to level price competition between domestic and imported products. 

The two major products under Department of Commerce and International Trade Commission investigations this year—based on allegations of dumping and subsidies—are oil country tubular goods (OCTG) and concrete reinforcing steel (rebar). The debate over the allegations and the solution, seen by many as far from perfectly applied, has become fractious. 

“U.S. steel producers can compete with anyone, as long as the playing field is level, with free and fair trade,” says Philip K. Bell, president of the Steel Manufacturers Association, Washington, D.C. 

When OCTG imports are sold to U.S. consumers at well-below-market prices, “what’s at stake are jobs, market share and a huge opportunity to take advantage of the energy renaissance taking place in our country,” Bell says.

United Steelworkers International President Leo Gerard, speaking July 29 on MSNBC’s “The Ed Schultz Show,” called steelmaking a cornerstone of the U.S. economy. “Other countries are so desperately getting their stuff in our market, not using it in their own markets, but costing us our jobs,” he said.

The average capacity utilization at domestic rebar mills is only 60 percent, and “at the height of incursion for [foreign] OCTG, we were down to 30 percent capacity utilization,” Gerard said.

OCTG probe

U.S. Steel Corp., Pittsburgh, idled its McKeesport, Pennsylvania, and Belleville, Texas, tube mills, telling shareholders that unfairly traded imports made operating the mills unprofitable.

Mario Longhi, U.S. Steel’s president and CEO, believes trade actions must match realities on the ground. “[Let] competitors come and play in North America but let them follow the proper rules under the law,” he said in a July 30 earnings call. 

In testimony given before the U.S. International Trade Commission, some foreign producers targeted by the OCTG investigation sought to be excluded from the case or suggested the petitioners’ claims don’t stand up to scrutiny.

Some argued they are exporting “green” tube, an unfinished product that has to be heat treated in the U.S. to qualify as an OCTG product. Some argued that their countries exported less than 3 percent of total imports, and should therefore be excluded under current trade rules. 

Foreign-owned producers like Tenaris, TMK Ipsco and Vallourec pointedly ignore their own imports in the probe “as if they do not compete in this market or have an impact,” testified Chuck Scianna, president of Sim-Tex L.P., a master distributor of imported OCTG.

The most repeated argument made by OCTG importers is that domestic producers are directly and aggressively competing with one another on U.S. soil. They are building additional capacity at the same time they claim imports have usurped their market share, and even while the pipe they make is primarily premium grades earmarked for “program sales,” which guarantee price and quantity over a fixed period to select customers. Program sales are not available to the foreign producers, importers said, due to an inability to guarantee precise quantities and deliveries.

“The last three years has seen over 700,000 tons of additional domestic capacity with more on the way. That capacity has put downward pressure on prices,” said Scianna. He claimed lead times and backlogs at domestic mills have risen and customers are on allocation for certain sizes. Both factors indicate they are not materially injured.

Another fact some pointedly ignore is that U.S. jobs are linked to international trade in steel, as well as being inherent in domestic production, says Richard Chriss, executive director of the American Institute for International Steel, Falls Church, Virginia.

Rebar probe

Salvador Behar, legal counsel for international trade at the Embassy of Mexico, told the ITC during a September 2013 conference that U.S. rebar manufacturers have a 90 percent share of the domestic market, and that they are already “protected by existing antidumping orders” covering imports from seven other nations.

Mexico’s rebar exports to the U.S. were stable for the prior three years and were “not shipped in a manner that could disrupt the U.S. market,” Behar testified. “Imports of rebar from Mexico have neither injured nor threatened to injure the U.S. rebar industry.”

Because Turkish rebar is competitive in quality and price with U.S. rebar, “sometimes producers that are not efficient in production, cannot compete with imports or want to keep prices high for higher profits, seek government protections as a tool for their own benefit,” Ebru Dursun, representing the Turkish Steel Exporters Association, testified at the same hearing.

Such intervention will work against consumers by diminishing “free and fair trade conditions and increasing the price in the domestic market artificially.”

Dursun refuted petitioners’ claims that Turkey had insufficient demand at home and lacked a wider export market. Turkey’s steel exports have diversified: It sold more rebar to the United Arab Emirates than to the United States in the past couple years. 

Alan Price, partner at Wiley Rein L.P., Washington, D.C., spoke on behalf of the petitioners. Rebar imports jumped 98 percent from 2010 to 2012, to reach 927,000 tons, “continued their surge into 2013” and accounted for 17 percent of domestic market share.

The impact of duties

“AIIS represents traders, importers, exporters, stevedores, port authorities, railroads and service centers,” for whom tariffs create a ripple effect, says Chriss. “You’ll see impacts in many areas: Ports will handle less OCTG, in some cases significantly less. Importers will suffer. Longshoremen that handle OCTG will possibly lose wages or their jobs. Beyond that, [oil and gas] well drillers will certainly be affected if less OCTG is coming in. Tariffs make it more expensive to drill. 

“Restraints on imports impacts the ability of our members to participate in a tremendous opportunity: the shale gas boom, and impacts the ability of the United States to become energy self sufficient. So we have to be careful about creating economic disincentive by trade barriers,” Chriss says.

SMA’s Bell agrees the U.S. has a chance to improve energy independence but when U.S. steelmakers avail themselves of trade remedies which indirectly service that goal, “that should not be characterized as preferential treatment. It is more of an attempt to have a global steel industry free of state-owned enterprises and subsidies.” 

Adam B. Parr, SMA’s vice president of policy and communications, concedes that even trade decisions in the domestic industry’s favor are not a cure-all. “We still have to address circumvention.”

Circumvention occurs when, say, a tube is shipped from Indonesia to a third country, undergoes some minor processing, then is shipped to the U.S. as if the material originated in that third country. “It’s one of the biggest challenges we face and we have to get tougher on it,” Bell says, adding, “With the proliferation of bilateral and multilateral trade deals, we need to have rules of origin and circumvention addressed.”

Fighting a label

Those opposing tariffs argue that steel is the most protected industry in the United States.

“If you look at the ITC calculations of 2011 and 2012, products made of iron and steel accounted for 44 percent of all U.S. antidumping and countervailing duty orders. Other products aren’t even close,” Chriss says.

“The U.S. industry is not overprotected,” SMA’s Bell retorts. “You’ll have to ask the free market theorists: Is it jobs, capital investment or the elusive, conceptual free trade framework that matters most?” Their arguments are “befuddling.”

Says Parr, “The U.S. is the largest open market and so how are we labeled as protectionist?”

Korean OCTG imports topped 729,000 metric tons through June (see table, page 20). “That amount is greater than the largest OCTG producer in the U.S. [makes in one year]. That alone makes you understand why one would file a trade case,” says Bell.

“With 600 million tons of excess global capacity we cannot be the market of last resort,” says Parr.  

Chriss concedes trade remedies do have a place and AIIS supports “their responsible and impartial application.” Perhaps the larger issue is global overcapacity, which “has been with us and has been worked on by the Organization for Economic Co-operation and Development since the early 2000s. 

“The hope is if you could develop a technical framework, including subsidies, you could move that framework from the OECD to the World Trade Organization” for rule-making, by which all WTO members must ostensibly comply. AIIS works with the U.S. Trade Representative to provide guidance for meetings of the OECD Steel Committee, Chriss says.

Cause and effect

Meanwhile, however, SMA and its member companies find duties to be an effective remedy when applied correctly. “Looking at OCTG, there have been robust month-to-month price increases. OCTG has reached its highest [price] level in the last year and a half,” Bell said.

Lewis Leibowitz, attorney at Hogan Lovells LLP, Washington, D.C., and a spokesman for the Consuming Industries Trade Action Committee, argues tariffs “don’t work for most people. Which is better for world peace? Low tariffs. [Duties create] the worst kind of uncertainty for a buyer of steel. If duties have their intended effect, it’s to prevent importation. It’s to assist petitioners in eliminating competition.”

It limits available product, pushing prices higher than they would otherwise be. And, over time, it causes substitution. Instead of importing a raw material, buyers will import a finished product, thereby diminishing demand for that domestic industry and destroying jobs at the next level of the supply chain. 

Nucor Corp. Chairman, President and CEO John Ferriola sees a form of substitution, too. “You win a case on one product and [exporters] immediately switch to another product. You win on beams, they go to rebar; you win on rebar, they go to merchant bar. We’re helping the ITC and Commerce Department to understand there’s a pattern.”

The U.S. market is experiencing “a tsunami of imported steel,” he said during Nucor’s July 25 earnings call. “Given the indisputable fact that mills in the United States are among the lowest cost producers of steel in the world, this makes no sound economic sense.” MM