Does a 25% tariff mean prices will rise 25%?

So President Trump confirmed, last week, that from later this week, he will formally introduce a blanket tariff on steel imports, at 25%, and aluminium, at 10%.

Both tariffs are in fact higher than those recommended by the DOC (Dept. of Commerce). In return, he stated to a number of metal manufacturers Thursday (March 1) "You'll have to regrow your industries; that's all I'm asking".

To be fair to US steel producers, that is exactly what they have been doing over the past year though they would be the first to admit that this is largely thanks to the plethora (around 30) of anti-dumping duties already limiting imports. To meet the demand for US-made steel in 2017, which rose by an above average rate of 5.0%, local mills increased their own steel production by 4.0%, to 81.64Mt. To fill the gap, whether directly or more often at re-rollers, net semis imports increased by 28% last year to 7.71Mt. In combination, this enabled them to ship 82.45M metric tons of "finished" steel; the highest volume recorded by the American Iron & Steel Institute (AISI) since 2014. However the percentage growth in mill shipments still paled in significance with finished imports which rose more than twice as quickly.

As we had expected, President Trump ruled out "option 3" in the DOC report, which would have restricted steel imports to 63% of their 2017 totals and more than likely would have caused a shortage in the market. A reduction in semis and finished imports would have required crude steel production to rise from 81.6M tons to 95.5M just to supply the same amount of steel required last year.



However, it is hard to imagine what difference to trade a 25% tariff, rather than a 63% quota, will make. For some observers nothing will change and the price simply rises to the level to incentivize the external supplier who is required to service local demand. That presumably is 25% and adds $189 per tonne to the average import price for HRC AMM recorded in February.

That of course is not the point of the exercise and while the tariffs might help government finances, not least with the American Society of Civil Engineers (ASCE) claiming petrol and diesel taxes need to double, increasing by 25cents a gallon to fund the ambitious Highway Trust Fund, it wouldn't restrict trade or support higher productivity in US metal production. What the 25% does do, however, is give us all a "ceiling" for US prices. So what is a more realistic price outlook?

When we ask external suppliers about commodity grade prices we track, we hear some interesting things. Had the duty been limited to 10-12%, for instance, we hear it would have made little difference to the steels that both local and external suppliers can produce. This may seem strange and need some analyzing (see below) but if true, suggests a more realistic price outlook is based on import prices 13-15% higher. Again using the example of HRC, that is a range from $98 to $114 per metric ton.



According to AMM's price archive, the average discount for imported HRC is just 8% and so by implication a 12% higher import price would make foreign steel more expensive to import than to buy domestically. This is unusual and therefore unlikely but has happened twice in the past year (see chart). But even in markets where the import price discount is greater than for HRC, such as the 14% for heavy plate, it is hard to imagine a US importer that would ever go through the hassle of importing steel for only a small discount. So the main reason why 10-12% wouldn't matter, is because the import price would not rise and the foreign supplier would absorb all of the tariff itself.

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