Firstly, a summary of events
On March 1, 2018, then-President Trump imposed the long-abandoned Section 232 tariffs on steel imports from the EU and China and 10% on aluminum imports, citing national security concerns. On June 1, the U.S. formally imposed tariffs on steel and aluminum imports from the EU, and the EU implemented countermeasures on June 22, imposing high retaliatory tariffs on some products imported from the U.S.
On October 30, 2021, U.S. Secretary of Commerce Raimondo announced that the U.S. and the EU had reached an agreement on the partial elimination of steel and aluminum import tariffs and that European steel imports would be partially exempted, provided that the imported steel is produced entirely in the EU, while also indicating that the steel and aluminum tariffs imposed by Trump in 2018 would remain in effect for countries other than the EU.
On Oct. 31, 2021, the Biden administration reached an agreement with EU officials at the G20 summit to eliminate some of the tariffs Trump imposed on steel and aluminum three years ago and reached a (Global Arrangement on Sustainable Steel and Aluminium) that introduced a quota system for tariff rates that would allow a specific amount of steel and aluminum trade between the U.S. and Europe to remain at low rates.
In return, the EU-27 will eliminate additional duties on U.S. imports, including Bourbon whiskey and Harley motorcycles (additional import duty rates on these goods would have been increased by 50% as of December 1).
Secondly, the actual impact of the U.S. steel and aluminum tariff increase on the EU in 2018
1, the impact on steel and aluminum trade in the European and American regions is significant.
By comparing the steel and aluminum production and import and export volumes in Europe and the United States in 2017-2019 (considering the impact of the epidemic in 2020-2021, it is more reasonable to judge the data in 2019), the following conclusions are drawn.
Maintaining the interests of the local industrial chain has become the main reason for import tariff increases. Since the 21st century, U.S. steel and aluminum production has been in a downward path, according to Mysteel, WSA, and USGS data, the U.S. crude steel production in 2017 was 81.61 million tons, down 19.09 million tons from 2000; aluminum production was 740,000 tons, down 2.93 million tons from 2000. Under the impact of low-cost primary aluminum in China, Russia and other countries, the U.S. steel and aluminum industry first-mover advantage is no longer, some such as Alcoa, Century Aluminum and other old steel and aluminum manufacturers’ smelting capacity began to progressively shut down or even permanently withdraw. The gap in the supply side can only be made up by imports. Since 2016, the U.S. reliance on imported primary aluminum is as high as 64%, and 25 million tons of steel need to be imported each year, resulting in the U.S. The interests of local steel and aluminum enterprises have been damaged and jobs lost, and some important “vote bank” states in the old industrial areas of the United States have reacted particularly strongly to this. The superposition of steel and aluminum is widely used in the defense industry, aerospace and other fields, in some parts of the key materials, a high degree of foreign dependence invariably increased the so-called “national” risk.
From the President Trump’s “America First”, “make America strong again, promote American prosperity” and other political slogans can be seen, in order to reduce the U.S. foreign trade deficit, to maintain the interests of the local industry, so that part of the manufacturing industry back to one of its main governing philosophy, so the main purpose of the implementation of steel and aluminum tariff policy on the grounds of “232” is to maintain the interests of U.S. domestic steel and aluminum enterprises and increase related jobs, in fact, it is also true that Trump’s wishes, 2018-2019 U.S. steel and aluminum enterprise production and related jobs increased significantly.
U.S. domestic steel and aluminum companies boosted production significantly in 2018-2019, quickly filling the supply gap caused by reduced imports. 2019 net U.S. steel imports were 19.84 million tons, down 5.31 million tons from 2017, with the reduction mainly due to a decline in EU exports, which also meant that the U.S. did not increase imports from other countries. But the reduction in imports did not lead to a significant gap in the supply of U.S. steel and aluminum at the time, starting in February 2018, the U.S. domestic steel and aluminum companies that began to significantly boost production, the supply gap brought about by the reduction in imports was quickly filled. Time to 2019, U.S. domestic crude steel production has grown to 87.8 million tons, an increase of 6.18 million tons over 2017, a growth rate of 7.5%; primary aluminum production of 1.093 million tons, an increase of 352,000 tons over 2017, a growth rate of 47.5%.
The EU did not find new buyers, exports fell sharply. 2018 after the United States imposed tariffs on EU imports of steel and aluminum, EU exports of steel to the United States began to decline significantly, 2019 EU exports of steel to the United States of 5.68 million tons, down 4.55 million tons compared to 2017, nearly cut. The EU has not found a new buyer since then, and the EU steel exports in 2019 fell by 6.17 million tons compared with 2017 (the U.S. crude steel production increased by 6.18 million tons during the period); the primary aluminum production in Western Europe in 2019 was 3.45 million tons, down 327,000 tons compared with 2017 (the U.S. primary aluminum production increased by 352,000 tons during the period), basically in line with the increase in U.S. domestic steel and aluminum, indicating that the impact is more limited to both Europe and the United States.
2, after the implementation of tariffs, Europe and the United States hot coil price difference instead gradually narrowed
March-July 2018 U.S. steel prices saw a round of relatively large increases. In the case of hot coils, for example, at the beginning of 2018, the CFR price of U.S. hot coils was only $650/ton, and on March 1, the CFR price of U.S. hot coils rose to $755/ton, driven by the news that there was a gap in the supply of U.S. steel after the implementation of the market transaction tariffs as a logic, and the CFR price of hot coils reached $953/ton on April 8, up 26.2% from March 1,; on June 1 to After the official implementation of the EU tariff increase, July hot roll CFR prices reached $ 978 / ton, up 29.5% compared to the news before the announcement. And the price difference between the U.S. hot roll CFR and EU hot roll market also once reached a high of $333/ton in July 2018. But after 2 months after the tariff implementation landed, the U.S. steel prices instead showed a trend down, and the European and American hot coil spread gradually narrowed. in October 2019, the European and American hot coil spread has narrowed to less than 100 U.S. dollars, verifying that even with the imposition of high steel and aluminum tariffs, the actual impact on the United States is actually more limited.
Thirdly, the specific impact of the United States and the European Union to cancel steel tariffs
1, the possible reasons for the United States to cancel part of the tariff
Inflationary pressure is high, forcing the U.S. to relax import restrictions. 2020 in order to stimulate economic recovery, the world’s major economies large-scale over-issuance of money (about 15 trillion USD), generating a large amount of consumer demand , but also made the price of various commodities rose sharply. The already severely damaged supply chain in the United States, coupled with high import tariff policy restrictions, has fueled a surge in the prices of industrial raw materials such as steel and aluminum (as of the end of October 2021, the price of the U.S. Midwest hot coil market reached a maximum of $2,155 per ton, up 3.35 times over the same period in 2019; LME aluminum prices reached a maximum of $2,748 per ton, 56.2% higher than the same period in 2019). As a result, it has greatly increased the inflationary pressure in the U.S. In September 2021, the U.S. CPI has been growing at over 5% on a yearly basis for five consecutive months, and even the Federal Reserve has had to publicly state that it will raise interest rates in mid-2022 if inflationary pressure gets too high.
In favor of easing the trade dispute between Europe and the United States. In return, the EU, for its part, will also cut retaliatory tariffs against the U.S. – the EU will cut tariffs on a wide range of U.S. goods by 50% on Dec. 1. The agreement is crucial because it reduces costs for U.S. manufacturers and spending for consumers, according to U.S. Commerce Secretary Raimondo. White House National Security Advisor Sullivan declared that the tariff agreement “removes one of the biggest ‘sticking points’ in the U.S.-European bilateral relationship.”
Relieve pressure on the world’s top carbon emitter to “peak and neutralize. The Biden administration rejoined the Paris climate agreement last year and set ambitious goals of achieving net-zero emissions in the power sector by 2035 and net-zero emissions nationwide by 2050. This has certainly earned the Biden administration more praise and has restored some measure of U.S. international leadership, while bringing millions of jobs to the U.S. (in sectors such as new energy). The shift in U.S. government policy has also led to a preference for increased imports of primary products from energy-intensive industries, thereby reducing the pressure on the world’s top carbon emitter to “peak and neutralize”.
Russia has increased export tariffs on ferrous and non-ferrous metals to prioritize domestic supply. The Russian government is imposing tariffs on ferrous and non-ferrous exports from August 1 to December 31, 2021, to safeguard domestic supply, which will include a basic rate of 15% and specific rates. According to Mysteel, Russia is the world’s second largest producer of electrolytic aluminum after China, the world’s No. 1 exporter of primary aluminum and the fourth largest exporter of aluminum alloys. 2019 Russian primary aluminum and aluminum alloy exports were 1.9 million tons and 840,000 tons, accounting for 17.4% and 6.9% of total global trade, with primary aluminum exports accounting for 52% of total domestic production. Japan, the United States and European countries are the main buyers of Russian primary aluminum, Russia imposed tariffs on aluminum exports, or lead to tightening the supply of the U.S. primary aluminum market, aluminum spot premiums climb.
2, in the short term, the EU may have difficulty exporting a sufficient amount of steel and aluminum to the United States.
After the U.S. gradually released part of the steel and aluminum import tariffs, the EU will be allowed to export 3.3 million tons of steel to the U.S. tariff-free each year, after obtaining the consent of the U.S. Department of Commerce, Europe will also be able to increase one million tons of duty-free quota each year. Theoretically, the U.S. steel and aluminum supply constraints will be effectively alleviated, which would slow down the rise in global dollar-denominated commodity prices and meet the Biden administration’s ambitious goal of “net zero emissions”.
The question is, even if tariffs are partially lifted immediately, can the EU really add millions of tons of steel and hundreds of thousands of tons of primary aluminum exports to the U.S. in the near future or next year?
By the end of October 2021, the price of hot coils in the Midwest was still as high as $2,085 per ton, representing a year-on-year increase of more than three times, which is enough to show that there is a large supply gap in the U.S. steel market. The market price of hot coils in the EU is $1,190 per ton, which is also significantly higher than other countries such as China and Japan as well as South Korea, which certainly has the factor of inflation, but also has the influence of supply and demand. According to the World Steel Association data, the cumulative global production of crude steel from January to September was 1.44 billion tons, a decline of 5% compared with the same period in 2019. Among them, the U.S. crude steel production was 64.36 million tons, a drop of 1.775 million tons compared with the same period in 2019. The EU crude steel production was 114.84 million tons, a decline of 4.77 million tons compared with the same period in 2019 (the EU’s crude steel production in 2019 was 12.12 million tons, falling by 47.34 million tons). In terms of numbers, EU crude steel has recovered even less than the US, and is down even more sharply than in 2017. As for aluminum, since 2018, the annual production of aluminum in Central and Western Europe has dropped significantly to 3.45 million tons, as a high energy consumption industry (10.7 tons of carbon emissions per ton of aluminum, 6 times that of steel; 13,500 degrees of electricity consumption per ton of aluminum, more than 22 times the electricity consumption of electric furnace steelmaking), in the current energy crisis facing Europe and “carbon neutral, carbon peak “Under the double constraints, it is impractical to increase production substantially in the short term, so the EU may consider other methods.
3, The EU might be go with China to increase steel and aluminum imports
As the EU crude steel production has not yet returned to the pre-epidemic level, a large increase in exports will cause its own supply constraints, there may be the possibility of increasing imports from China and Russia.However, given that since 2017, China itself is also in the process of reducing capacity, especially when the next few years will be a key period of China’s energy and industrial transformation, steel and aluminum oversupply situation will gradually be eased, coupled with high energy consumption industry “carbon neutral, carbon peak” pressure than other industries. The following will briefly discuss the feasibility of Europe and the United States to China to seek to increase steel and aluminum imports.
However, in view of the fact that since 2017, China itself is also going to production capacity, especially in the next few years will be a key period of China’s energy and industrial transformation, steel and aluminum oversupply pattern will gradually ease, coupled with high energy consumption industry “carbon neutral, carbon peak” pressure is greater than other industries, so the following will briefly discuss Europe and the United States to China to seek to increase Therefore, the following will briefly discuss the feasibility of Europe and the United States seeking increased steel and aluminum imports from China.
In the short term, China may be able to increase steel exports under the condition that priority is given to meeting domestic supply. Despite the current strict policy of crude steel production reduction in China, China’s cumulative crude steel output from January to September was still as high as 806 million tons, up 2% year-on-year, while steel exports accumulated 53.02 million tons, up 31.1% year-on-year. In order to guide the upgrading and transformation of the industry and prioritize the domestic supply, the export tax rebate policy for steel was cancelled in May and August. However, after the time into the fourth quarter China found that domestic demand fell faster than expected, a number of large steel enterprises feedback in November received a serious shortage of orders, some companies’ new orders for cold plate only reached 50%, exports to the EU might be a better way to boost demand in the short term. The EU can export self-produced steel to the United States, which will lead to multiple benefits. However, it should be noted that Europe currently has 13% of China’s imports of steel tariffs, 21.2%-31.2% of aluminum imports anti-dumping duties, coupled with a strict quota system, a large increase in direct steel and aluminum trade between China and Europe in the short term is not a possibility, perhaps through Japan, South Korea and Southeast Asia to achieve re-export trade.
In the medium and long term, China’s steel exports will show a decrease in quantity and increase in quality. The goal of “carbon neutral, carbon peak” will be a long-term suppression of China’s high energy consumption industry, even if exports can reach 65-70 million tons in 2021, in comparison with the peak in 2015-2016, China’s exports have actually declined significantly. In 2022, China’s steel industry will continue to reduce the growth of supply and demand (with a high probability of a double-decline pattern), but next year will be a big year for policy, and the phased outbreak of demand may lead to tight supply, and exports may exceed expectations under the temptation of large price differences between domestic and overseas, hence a certain amount of policy is needed to regulate, but a moderate increase in exports of high end, high value-added plates is in line with the development direction of China’s steel industry.
China’s demand for electrolytic aluminum continues to grow, and may continue to increase aluminum imports. In 2021, China’s electrolytic aluminum production side was disturbed by energy consumption double control, power shortage and other factors, resulting in a relatively tight domestic supply. From January to September 2021, China’s actual consumption of electrolytic aluminum was 30.02 million tons, with a 6.08% year-on-year increase, net imports of 1.247 million tons, with a 64.6% year-on-year increase, and production of 29 million tons, with a 5% year-on-year increase. Consumption growth rate is faster than supply growth rate, and aluminum inventory remains relatively low. In the long run, in the “double carbon” target suppression, domestic electrolytic aluminum difficult to break through the supply-side reform when the development of 45 million tons of capacity ceiling, and with China’s high energy-consuming industries to move overseas, new energy and lightweight demand surge, is expected to continue increasing import demand.
Overall, Cancellation of steel and aluminum tariff in Europe and the United States could lead to a cascading effect on world steel and aluminum trade. (Source: MySteel)