Steel prices have risen sharply since President Bush imposed import tariffs three months ago, causing unexpected hardship in steel-consuming industries and fueling a political backlash that could hurt the White House.
Prices of benchmark steel products have soared 30% to 50% this year, far more than predicted when the president slapped tariffs of as much as 30% on steel imports to protect domestic producers from foreign competition.
The tariffs were widely viewed as politically motivated, a bid by Bush to win Republican votes in the Steel Belt of Pennsylvania, West Virginia and Ohio. But much of the negative effect is in the adjacent Rust Belt, where auto makers and their thousands of suppliers are huge customers of the steel industry.
“I think he’s doing more harm to the country than he realizes,” said Michael Aznavorian, president of Clips & Clamps Industries in Plymouth, Mich., whose firm has been hit with price increases of 17% to 42%.
Officials at the Commerce Department and U.S. trade representative’s office declined to comment on the price increases. But Grant Aldonas, undersecretary of Commerce for international trade, has acknowledged that the administration had not expected the initial price spike and was concerned about its potential economic effect.
Steel industry officials insist that the effect of the price increases is being exaggerated. Much of the steel consumed in the U.S. is purchased under long-term contracts that have not been affected by price spikes, which are occurring on the spot market. Even spot prices are not that high by historical standards. The average price of hot-rolled steel from 1981 through 2000 was $338 a ton, about the same as today’s spot price.
“It’s some of the smaller steel consumers who are more subject to spot market pricing who are making the hue and cry,” said Nancy Gravatt of the American Iron and Steel Institute, which represents steelmakers. “When steel prices were at 20-year lows last December, they should have been projecting in their business plans for 2002 that the price would increase.”
Even the president’s critics acknowledge that other factors are contributing to the price increases. More than 20 U.S. steel mills have shut down or gone on standby in the last 18 months, reducing steelmaking capacity by 25 million tons. For the first time in years, U.S. steel companies can’t keep up with demand, which is beginning to revive as the economy emerges from recession. The supply shortfall will be alleviated somewhat when new owners of shuttered plants previously operated by steelmaker LTV Corp. bring some capacity back on line in coming months.
“The moderate upturn in the economy, combined with the supply shortage, is what is really driving up the prices,” said Ben Goodrich, a steel analyst at the Institute for International Economics in Washington. “I think it has very little to do with the tariffs.”
But such explanations are viewed with skepticism by the people who buy raw steel and turn it into finished products.
“I think that’s baloney,” said Bruce Walker, who runs a metal-forming plant in Ontario. “As soon as the tariffs were announced, the prices went up immediately. Isn’t that a coincidence?”
Meanwhile, low supplies of certain types of steel are causing buyers to scramble to negotiate future purchases before prices rise further. Profit margins are being squeezed in steel-using industries, which have been absorbing higher costs rather than raise prices and risk losing business to foreign rivals. There is talk of future layoffs, business failures, factory relocations--and political retribution.
“There’s definitely a panic mentality out there,” said steel industry consultant Christopher Plummer of West Chester, Pa.-based Metal Strategies. “I don’t think there’s anyone in the market ... who expected anywhere near this kind of magnitude.”
The tariffs also have triggered threats of retaliation by Europe and other U.S. trading partners.
It could be several more months before the tariffs work their way through the steel markets and the effects become clear, experts say. But barely three months after the tariffs took effect, the dislocations are undeniable.
Hot-rolled sheet steel sells for about $340 a ton on the spot market, according to the June survey by Purchasing Magazine. The price has shot up 62% since December, when steel fell to 20-year lows, and has gained 48% in the months since Bush issued his tariff order.
For Walker, president of Walker Corp., a 48-year-old family-owned firm, the arithmetic is scary. Walker’s company employs about 130 people, and rang up nearly $20 million in sales last year. It paid about $5 million for the steel it used to make brackets for air bags, cases for car stereos and other parts. If prices rise 20%, Walker’s profit margin could disappear.
“I’m very concerned about the next year. If I can’t pass these increases along to the customer, we will definitely have to reduce our work force,” Walker said. “I’m a conservative by nature and generally support the president, but this was a huge mistake.”
Steel users are lobbying the White House to rescind or reduce the tariffs before their scheduled expiration in 2005. Failing that, they want the administration to be generous in awarding tariff exemptions for steel products not produced in large quantities by U.S. mills. The administration received more than 1,200 exemption requests; it has approved 107.
Bush announced March 5 that he was placing temporary tariffs of as much as 30% on some categories of imported steel to give the domestic industry more breathing room to restructure. The action was based on a trade law that allows the president to protect U.S. industries whose survival is threatened by surging imports.
At the time tariffs were imposed, many industry executives, administration officials and independent economists predicted the effect on steel consumers would be limited. Average steel prices might rise 5% over time, they said, but not enough to cause appreciable damage. It now appears the administration may have miscalculated, in both economic and political terms.
“Whoever was advising him, I don’t think they understood how fast the prices would increase and how much harm could be done,” said Roy Berlin, president of Berlin Metals in Hammond, Ind. “I think the mills themselves have been caught by surprise at how tight the market’s been. They are in a dream world right now of being able to sell any ton at almost any price.”
Steel buyers said the higher prices, if they stick, are bound to reduce employment in industries that are major buyers of steel. For some firms, that could mean layoffs; for others, fewer new hires.
At GR Spring & Stamping in Grand Rapids, Mich., 10 jobs already have evaporated. That’s how many people President Jim Zawacki was planning to hire to crank out a new line of engine compartment parts for a major automotive supplier. But when he revised his terms in April to reflect higher steel prices, the deal fell apart.
“We submitted a bid subject to what happened with the tariffs,” said Zawacki, who keeps about 200 people busy making metal parts for cars, appliances and furniture. “We would have been hiring in 2002.”
He said an additional three jobs were lost when a customer took his business to Mexico, where metal-forming firms can buy steel at tariff-free prices. Zawacki has not laid off anyone since the tariffs took effect, but he said he will have fewer employees by year’s end than if Bush had not intervened.
Aznavorian, of Clips & Clamps Industries, said his suppliers no longer are willing to enter into “blanket” contracts that lock in prices for six months to a year.
“Nobody will give us a blanket,” said Aznavorian, whose 60 employees generate about $10 million in annual sales. “We’re basically buying everything on the open market. It’s eating up my bottom line.”
One of Clips & Clamps’ main products is a bracket used to mount cruise control units in DaimlerChrysler trucks. Before prices began rising, Aznavorian saw a profit of about 1 cent on each 57-cent bracket that rolled off his line, with the steel used in each costing 25 cents. But the steel in each bracket now costs 37 cents, and Clips & Clamps could lose 11 cents on each bracket it ships.
Aznavorian and other steel-buying executives say they hope Bush will rescind or relax the tariffs after reviewing the effect they are having on downstream industries.