US higher steel tariffs could backfire, reduce capex in chemical, industrial plants – ICIS economist

SAO PAULO (ICIS)–Potential US 25% tariffs on steel and other metals could ultimately reduce capital expenditure (capex) in chemicals and industrial plants as costs rise, according to an economist at ICIS.

Kevin Swift, senior economist for global chemicals at ICIS, said “steel is a classic example” of how tariffs work and can harm other manufacturing industries.

At the weekend, US President Donald Trump said he plans to impose fresh 25% tariffs on steel and aluminium imports.

“Any steel coming into the US is going to have a 25% tariff – aluminium too,” said Trump.

Canada, Brazil and Mexico supply most steel to the US. Trump said the metal levies would apply to “everybody” but the White House has not yet published an official communication on these tariffs.

Earlier on Monday, Brazilian daily Folha de S. Paulo cited an unnamed government source saying Brazil could tax more to US technological majors in retaliation for the steel tariff: around half of Brazil’s steel output is sold to the US. The economy minister, Fernando Haddad, denied such a possibility later in the day.

The US’s chemicals trade group the American Chemistry Council (ACC) had not responded to a request for comment at the time of writing.

HIGHER PRICES, LOWER INVESTMENTS
With the US’s steel output declining for decades, the country’s strong manufacturing industries have become dependent on imports, with a large trade deficit.

It remains to be seen whether higher tariffs can also bring back to the US higher steel output. In the meantime, however, higher tariffs are going to increase prices for a variety of manufacturing sectors, who will lose competitiveness when they try to pass higher costs on.

“A tariff raises the price in the market as domestic steel producers raise the price for steel to match the tariff… Higher price lowers quantity demanded (law of demand) but does increase quantity supplied by domestic producers. Tariffs allow inefficient domestic products to produce when then they could not have done so without the tariff,” said ICIS’s Swift.

“Steel tariffs will raise the cost of building a chemical plant, for ongoing maintenance, etc. These will especially hurt when government policy is to foster re-shoring and FDI [foreign direct investment] in the US.”

Swift cited two studies conducted during Trump’s first term, when higher tariffs on steel were imposed on some countries.

One of the research pieces examined the impact of higher tariffs on employment in US steel and aluminium industries: jobs in these metals, mainly steel, would increase by 26,000 over three years, but at the same time employment in the rest of the economy would decline by 433,000 jobs.

“Owing to damage of higher steel and aluminium prices on customer industries,” said Swift.

“Another analysis focusing solely on steel shows that steel users paid an additional $5.6 billion for more expensive domestic steel; steel users will pay about $650,000 for each job created in the steel industry.”

TEMPORARY RISE
Analysts at London-headquartered Capital Economics were more optimistic, arguing that any price rise due to higher tariffs would be temporary.

“If 2018 is any guide, steel and aluminium import prices will rise one-to-one with the new tariffs. But the import share of steel, the more important of the two for domestic consumption, has fallen by 8%-points since then to 32%. That lower import intensity means the tariffs will have a smaller impact on US prices,” said the analysts.

“The rise in US steel prices then was short-lived, as US production rose, demand fell amid a global industrial slowdown, and Trump granted an exemption for imports from Canada and Mexico. The current low level of industrial utilization in the steel sector means there is again scope for production to pick up.”

Capital Economics was more doubtful about the positive impact of the higher tariffs in both the steel sector but also the wider economy.

“Any rise in production is unlikely to materially boost the overall economy. Even if total fabricated metals production rebounded to the peak seen after the first Trump steel and aluminium tariffs, it would boost industrial production by just 0.4% and GDP by just 0.05%,” they concluded.

Frong page picture source: World Steel Association (Worldsteel)