By Jeff Ferry, CPA Chief Economist
On Oct. 20th, US Steel produced the first ton of steel from a brand new steelmaking facility in Fairfield, Alabama. The new facility uses the latest, cleanest steelmaking technology, an electric arc furnace (EAF), and will produce 1.6 million tons of steel a year. Three days later, Nucor broke ground at Brandenburg, Kentucky on a new steel plate mill that will employ 400 staff at an average annual salary of $72,800. In August, Commercial Metals Company announced plans to build a second rebar mill at its Mesa, Arizona location, to employ 185 staff when complete. The new mill will use an innovative process to reduce power consumption and will also include a solar array on the premises to generate renewable energy, making it one of the cleanest steel mills in the world. Arizona officials say the new mill will bring a total of 1,000 new manufacturing jobs to the state.
And yet many economists and media reporters say the steel industry is in decline and the Trump administration steel tariffs are not working. In recent articles, Bloomberg News, the Wall Street Journal, and the New Yorker have all criticized the steel tariffs. Part of this is pure politics. Those publications don’t like Donald Trump and tariffs are associated with Trump. But a lot of it is simple misunderstanding of the goals and impact of the tariffs.
For those who understand the US steel industry and industry in general, the steel tariffs are a big success. They have generated a boom in steel investment, a shift to newer technology, a rationalization of the industry, increased domestic market share, security of supply for steel customers, and high-paying jobs for thousands of new steelworkers.
Enacted under Section 232 of US trade law to protect national security, the steel tariffs were based on a recognition that the market for steel for national security cannot be separated from the market for steel for civilian uses. A healthy, technologically advanced steel industry needs both markets to thrive and both markets need high-quality steel to maintain US competitiveness in the world including advanced national security equipment, armaments and infrastructure.
The steel industry is one of the purest examples of economies of scale. Once a company has built a large steelmaking facility, the cost per ton falls as the steel output rises. The closer a facility can be pushed to its maximum capacity production, the more unit costs fall. It often makes sense to increase production by finding overseas markets to sell in, even at uneconomic prices. This has been the path the Chinese steel industry followed, dominating the world industry with 53 percent of global steel production in 2019, according to the World Steel Association. The fact that many Chinese steel companies are losing millions of dollars a year doesn’t matter, since China’s government-owned banking system keep them afloat with a steady stream of new loans. The millions of tons of steel dumped in foreign markets depresses the worldwide price of steel and makes it difficult for any non-Chinese company without access to an endless supply of loans to compete.
The aim of the 232 tariffs was to drive down the level of imports in the US market so US steel producers could plan for the future and take the industry forward with confidence. The price of steel is highly volatile. Import surges, or even the threat of import surges, can depress the price and make it difficult for US steel companies to get investor support to invest and grow the industry.
Figure 1 shows the tariffs were successful in driving down import market share. The graph, from the Department of Commerce’s August steel report, shows that steel imports, which bounced around between 23 percent and 35 percent for most of the 2014-2017 period have trended down since the March 2018 tariffs. According to the AISI steel trade association, steel imports in the first nine months of this year were just 18 percent, comfortably below the 21 percent target for import penetration that was set out by the Commerce Department in its 2018 report recommending the tariffs.
Figure 1. Steel import penetration in the US market 2010-2020
With lower imports, the US steel industry did indeed begin to invest. It almost seems as if the tariffs served as a starting whistle. Table 1 shows the investment plans of the large steel companies, based on their public press releases, investor communications, and media interviews.
The table summarizes the investment plans from the six largest US steelmakers (which are now five, as Cleveland-Cliffs acquired AK Steel in March 2020). These companies account for 80 percent of US steel production, and they set the path for the entire industry. A successful US steel industry depends on the success of these companies, which depends in turn on their ability to invest and stay at the leading edge of the industry in terms of cost, technology, efficiency, and customer service.
As the table shows, the leading companies more than doubled their investment spend between 2017 to 2019, from $1.5 billion to $4.2 billion. This money is going on new steelmaking facilities, new steel mills and new iron processing facilities all over America, from Florida in the east to Toledo in the Midwest to Arizona in the southwest. These new facilities are almost all based on the shift into the modern method of steelmaking, via electric arc furnace (EAF) technology. EAF steelmaking is more efficient i.e. less expensive per ton of crude steel. It is also much cleaner than traditional blast furnace steelmaking (known as BOF for basic oxygen furnace steelmaking). EAF steelmaking does not use coking coal, eliminating the most polluting element in the steelmaking process. It is also less labor-intensive and safer, i.e. fewer accidents and fewer fatal accidents per ton of steel.
In addition to the physical investments, two major steel companies made major acquisitions since the tariffs to speed up their transition to modern EAF steelmaking. US Steel acquired a 49 percent stake in Big River Steel, an Arkansas EAF steelmaker that is now doubling its steelmaking capacity. Iron-ore miner Cleveland-Cliffs went on an acquisition spree in 2020, acquiring AK Steel for $1.1 billion and in September agreed to buy ArcelorMittal’s US steel facilities for $1.4 billion. These deals require leverage (debt) and would not have been possible without the more secure environment created by the tariffs. The full, multiyear value of all investments announced by the steel industry is an estimated $14 billion.
The US now has a more modern, healthier, technologically advanced steel industry than it has had for decades. The US now produces 70 percent of its steel via EAF, one of the highest figures among major steel producing nations. China produces just 10 percent of its steel via EAF. China is not only the major source of world oversupply of steel but also the major supplier of dirty, blast furnace-based BOF steel. The carbon border tax that Joe Biden is reported to favor could be used in conjunction with Section 232 tariffs to keep out low-quality steel from China and other old-technology steelmaking nations.
Each one of these new US steel manufacturing facilities employs or will soon employ hundreds of workers. A look at the pay scales at these steel companies shows why a healthy, modern steel industry is good for US workers. The data on median employee pay in Table 2 comes from the companies’ 14A reports filed with the SEC. The average median pay of these employees is nearly $83,000. For comparison, we’ve included the median pay of five very large US employers, which are often the likely employment for workers without college degrees in many states between the two coasts. The median pay for these five retailers averages to just under $27,000.
The steelworkers’ pay is triple the median pay at the retailers.
The huge pay differentials in the table illustrate the point CPA has made with its Job Quality Index, that the decline of manufacturing jobs leads to lower quality jobs as measured by weekly or annual income. As the US has moved to a more casual economy, more workers work part-time. Running a steel mill is not a business for casual employees. The large steel companies pay well and their employees work full-time and with benefit packages. The two technology leaders in the industry, Nucor and Steel Dynamics, both of which use exclusively EAF steelmaking, also give bonuses to employees based on profitability, leading to six-figure median pay levels in good years.
In today’s world, economic success is about what industries a nation chooses to specialize in. And it is a choice. China has no natural advantages in steel: it imports the iron ore mostly from Australia and uses steelmaking techniques invented in England in the 19th century. It is using massive government subsidies to drive steelmaking out of business in other nations. Basic manufacturing, where steel is a key ingredient in so many processes and products, provides good jobs on a large scale. Walmart and Target are great companies, but their business models are based on paying their staff $23,000 a year. To rebuild our economy and restore broadly-based prosperity, we need companies like Nucor and Steel Dynamics to grow and prosper. And we need more companies like them.
Answering the Tariff Critics
To sum up the above, the argument is relatively simple: China has saturated the world steel market, forcing every other nation to make a choice: either to allow its steel industry to wither away or to decide that steel is an essential ingredient in a modern economy and protect its domestic industry from Chinese competition, which is based on subsidized, literally out-of-control production of dirty steel. China has demonstrated its inability or unwillingness to restrain its own production.
The right way to address that problem is through protection from the unfair competition and creating an environment for the US industry to grow. Ultimately, an industry that grows and becomes more advanced, competitive, and clean will create more jobs. The level of jobs, however depends on the level of demand for US steel, and that depends on growth in steel’s end-markets, including autos and construction. In our view, steel is an essential building block in hundreds of other industries, vital to national security, and modern steelmaking is a highly efficient, productive activity with high employee pay levels.
That doesn’t mean that total employment or total steel production will grow every quarter or every year with tariffs. But it does mean that over time, as the US economy grows, production and jobs will grow.
The tariff critics have taken several different approaches in their criticism. Some of their arguments are purely short-termist, attempting to argue that the slowdown in production during the COVID shutdowns earlier this year tell us something about the tariffs. But the shutdowns would have happened with or without tariffs, and the industry is rapidly returning to the 80 percent capacity utilization levels we saw last year.
Another common line of argument concerns steel prices. Some tariff critics argue that steel prices are too high, hurting steel consumers. Others argue they are too low to provide enough protection for the steel industry. In general, these critics have little idea where steel prices actually are at any given moment and do not express an opinion on where they ought to be. In most cases, they have no understanding of what drives steel prices. Many of the economists have the economist’s blind faith that tariffs raise prices by the full amount of the tariff.
There is no evidence to support this belief. As Figure 2 demonstrates, the recent history of steel prices is complex. Steel prices did rise around the time that tariffs were implemented, for six months. Between January and July 2018, using the Steelbenchmarker price for hot-rolled coil, a commonly used form of steel, they shot up 37 percent. However, they peaked in July 2018 and fell 22 percent in the next six months. Over the course of 2019, they fell another 29 percent. In fact, the average price for hot-rolled coil in 2019 was $677, 1 percent lower than the average price of $685 for 2017. That’s despite the fact that there was no tariff in 2017 and a 25 percent tariff on imported steel in 2019.
Figure 2. Monthly steel prices January 2016-October 2020
In fact, the price of steel has little to do with tariffs. The fundamental drivers of steel prices are supply, demand, and competition. However, the stocks of steel held by steel market intermediaries, the service centers, serve as a source of short-term supply and amplify the effects of price changes. If market participants expect there to be a shortage, they stock up on steel and that tends to drive prices up rapidly and prices overshoot. On the other hand, when market participants foresee a depressed end-customer market, they try to run down or sell their stocks and that drives prices down rapidly, and they undershoot. In 2020, the COVID crisis led to market players anticipating a deep recession, running down their stocks, and steel prices declined. Since the summer, market participants realized that the US economy was coming back more quickly than expected, leading to a scramble for steel. The steel price jumped $171 a metric tonne between August and October. Prices will probably retreat from here over the next few months. But for the moment, a sense of shortage exists in the market. “We’re telling our customers to order now the steel that they will need in February and March next year,” says Bill Hickey, chairman of Lapham-Hickey, one of the nation’s largest steel service centers. Hickey says the tariffs put a “floor” under the market but competition has kept US prices competitive, at times even below world steel prices in the last couple of years. “Without the tariffs, we would have had bankruptcies. Steel is fungible. Chinese steel goes to Vietnam, floods Europe, and comes into the US. The tariffs stopped that.”
Barry Zekelman’s Zekelman Industries buys 2.5 million tons of steel a year, finishing it into tube, pipe and other steel forms used primarily in the construction industry. Says Zekelman: “The tariffs have been good for the industry and good for steel consumers. We have higher quality steel, more regionally located steel available, at lower cost, with greater security of supply, and greener steel. This has boosted the entire steelmaking and steel-consuming economy.”
Zekelman Industries employs 2,500 people today, and has added 700 employees since the beginning of 2017, due to strong construction demand. Zekelman is now building a tube mill in Arkansas with a capital budget of $160 million. He says that despite COVID, construction is booming. “Amazon and the others are building warehouses and distribution centers, housing is booming. We’re looking to hire 500 people across Zekelman Industries and our biggest challenge is that we can’t find good people.”
Improving on the Tariffs
Within the steel industry, there are many different shapes and varieties of steel and specialty steels. Each one has its own market and set of competitors. The tariffs, which levy a 25 percent fee on all imported steel, do not distinguish between these sub-markets. The fundamental economics of steelmaking discussed above apply to many of these specialty products. It can be economical for a producer to over-produce a specialty steel and dump the excess production in a foreign market. One broad-brush 25 percent tariff on steel doesn’t stop that. The US, as the world’s largest consumer market and the world’s biggest steel importer is a tempting target for such overproducers. This is why the Trump administration has in recent weeks initiated two actions relating to specialty steel imports, one for electrical steel and another for so-called oil country tubular goods or OCTG.
Barry Zekelman says quotas would be a more efficient solution than tariffs. Quotas could be set out for each type of specialty steel. As long as there is sufficient competition between domestic producers, steel consumers could be confident that prices would remain competitive. With a more secure market, US steel companies could invest in their production capabilities, and steel producers and consumers would benefit.
Another critique of the tariffs is that they can worsen the plight of steel consumers who are struggling to compete against dumped goods that use steel. The steel tariffs provide an incentive for nations with a surplus of steel (mainly but not only China) to turn the steel into other products that are not tariffed and ship them into the US. The degree of oversupply of steel in China is so severe that it can lead to distorted markets in steel-using products. The Trump administration decided to levy tariffs on steel and on selected exports from China to the US avoided tariffing consumer goods to minimize US consumers’ noticing the tariffs. That effort has been largely successful, but has worsened the plight for some steel-based goods made in the US that are now competing with more aggressive Chinese competition. Stainless steel flatware is such an example. It would make sense to extend the tariffs to other products where steel plays a major role.
The 25 percent tariffs implemented in 2018 on imports of steel into the US have been highly successful in making the steel market more stable and reliable and increasing sources of US supply for steel. Like many commodity prices, steel prices continue to be volatile, but the tariff impact on prices has been small and disappeared entirely by the fourth quarter of 2018. At the same time, the US steel industry embarked on an investment and modernization campaign that has been embraced by all major US steel producers and is giving the US one of the most modern, efficient, and cleanest steel industries in the world. Steel consumers, including auto companies and many others, have benefited from greater security of supply while competition ensures a healthy choice of suppliers and competitive prices.
The incoming Biden administration will face a choice as to whether to continue the steel tariffs or adopt a new policy. Multinational allied negotiations with China, an idea Biden has mentioned many times, have been tried before with no visible impact on China’s relentless increase in steel production. A new initiative could take years to have an impact while withdrawing the US tariffs quickly could have an immediate destabilizing effect on the US industry. Any policy should consider that long-term (not month-to-month) growth of steel production, employment, and productivity will benefit US economic growth and broadly-based prosperity.