Steel profits soar, showing power of tariffs

US steelmakers generated over $1bn more profit in the first six months of 2018 as mills boosted output and prices to supplant imports displaced in the wake of the Trump administration's 25pc tariff on steel imports.

The first earnings release after the tariff took effect 23 March showed that US producers recorded $5bn in earnings before interest, taxes, depreciation and amortization (Ebitda) in the first six months of the year, a near-30pc increase over the $4bn earned in the same period a year earlier.

Data from the American Iron and Steel Institute (AISI) and US Commerce Department show that domestic mills shipped 1.8mn tons (st) more steel in the first half as imports fell by 1.9mn st.

Selling prices for most grades soared, fueling a $6bn increase in revenue that dramatically outpaced raw material costs as the steel tariff dried up alternative sources of cheaper foreign steel.

"I am bringing steel back in a very big way," US President Donald Trump tweeted in a victory lap in early August.

Industry executives took a more measured tone.

"The reduction in dumped and illegally subsidized steel should allow steel prices to return to their fair levels," Nucor chief executive John Ferriola said in announcing the Charlotte-based steelmaker's highest-ever second-quarter earnings in July. The company is the US' largest producer.

"We support [the US government's] attempt to create a more level playing field for domestic steel producers and we have seen positive change," Steel Dynamics chief executive Mark Millett said in his company's second-quarter earnings call a week earlier, a record for the Indiana-based producer.

Tim Timken, chief executive of Ohio-based steel bar producer TimkenSteel, pointed to a strong economy. "Where demand is high, prices naturally rise at healthier levels," Timken said. On the tariff, "that too is helping to restore fair pricing."

Pittsburgh-based US Steel has been among the most buoyant in linking the revival of the steel industry to US trade policy.

"We are experiencing a renaissance at US Steel," chief executive David Burritt said this month, crediting Trump's Section 232 action on steel imports. The company is restarting two idled blast furnaces at its Granite City, Illinois, sheet mill on the Mississippi river in response to the tariff, prompting a celebratory visit from Trump in July.

But steel consumers are feeling the sting of higher prices, with steel and aluminum cost increases of well over $1bn forecasted for 2018 by the country's largest manufacturers.

Automaker General Motors cited steel prices as the primary driver behind $600-700mn of raw materials cost headwinds it expects to incur on the year. Ford expects a similar impact.

Heavy equipment maker Caterpillar expects the tariffs on steel and aluminum to lift its raw materials costs by $100-200mn in the second half of the year. The Peoria, Illinois-based manufacturer plans to offset higher costs by increasing the selling prices of its construction machines.

US steelmakers' objections have largely thwarted oil and gas company efforts thus far to exempt steel pipe imports from the tariff that they say is not made in the US or cannot be procured from US producers in time to meet project schedules. Plains All-American Pipeline said its waiver denial for 155,000t of steel for its Cactus 2 pipeline in Texas will cost $40mn unless it succeeds on appeal.

While the tariff slowed the flow of foreign steel to US shores, it did not halt shipments altogether.

The 14mn st of imported finished steel through June represented 25pc of US consumption even as overall intake fell by nearly 10pc year-on-year, according to the AISI.

Early-year volumes ticked up as buyers rushed material into the country ahead of the tariff, while the US' largest steel suppliers continued to ship tariff-free.

Trump exempted Canada, Mexico, the EU and others from the steel and aluminum tariffs to allow the countries an opportunity to negotiate trade deals more favorable to the US. But the administration lifted the exemptions for Canada, Mexico and the EU on 1 June after failing to successfully renegotiate the North American Free Trade Agreement (Nafta) or strike a deal with the EU, prompting reciprocal tariffs against exports of US steel and other products. The administration has also signaled it could be close to a deal with Mexico, one of the largest suppliers of steel to the US.

But domestic producers continue to march closer to the 80pc production capacity utilization cited by Commerce Secretary Wilbur Ross as a threshold level for a healthy domestic steel industry in his report to Trump recommending action against imports. Capacity utilization in the US averaged 75pc in the first half, but reached 79pc in recent weeks.

The US steel industry is expected to remain strong even as prices are believed by some market participants to have peaked, and Trump shows no sign of backing away from protectionism.

"Our steel industry is vital to our security and to our prosperity, Trump told a cheering crowd of steelworkers in Granite City in his July visit.

"If you don't have steel, you don't have a country."