Special Report: Thyssenkrupp, Voestalpine set to gain from sweeping US-EU steel and aluminum deal — Panjiva


Special Report: Thyssenkrupp, Voestalpine set to gain from sweeping US-EU steel and aluminum deal

Canada 475 European Union 782 G20 33 Materials - Metals/Mining 713 Metals - Aluminum 229 Metals - Steel 484 Mexico 847 Tariffs 1771 Trade Deals 982 U.S. 5260

The U.S. and EU announced a deal to replace Section 232 tariffs on steel and aluminum with a tariff-rate quota system, signifying a thaw in trade relations between the two regions. This is a special report on the tariffs and possible outcomes from the resolution. 

The source of the matter

The U.S. and EU have agreed to  partially lift Section 232 tariffs on steel and aluminum. The breakthrough came right at the deadline set by the EU, thus preventing an increase in retaliatory tariffs on U.S. goods that was set to go into effect in December.

Tariffs on steel and aluminum were  announced on March 1,  2018, using the Section 232 process designed for national security, with official documents following shortly thereafter. Section 232 is a part of U.S. trade law that allows the president to take action on matters regarding national security that fall outside the sanctioned remedies the World Trade Organization (WTO) prescribed. There is a national security carve-out under WTO rules, inherited from the GATT, but it was rarely used. 

The first test for the carve-out came in April 2019, when the WTO dispute settlement body ruled that Russian actions against Ukraine and other countries rose to the level of national security. Significantly, however, the panel ruled that national security exemptions fall under the jurisdiction of the WTO and can be reviewed. This cleared the way for the steel and aluminum challenges with the WTO to continue, and potentially set a precedent for expanded use of the national security exemption in the future.

The 25% tariff on steel and the 10% tariff on aluminum enacted in 2018 initially had several carve-outs for steel — including the EU, Canada and Mexico — that were quickly closed in follow-up announcements. The only countries that saw permanent exemptions were Australia and South Korea, with Argentina’s products exempt until December, and Brazil losing an exemption before regaining it that same month. The tariffs on goods from Canada and Mexico were eventually removed with the signing of the USMCA in 2019. Many countries, including those in the EU, put in place retaliatory tariffs on U.S. goods, and the scheduled escalation of those measures in the EU likely influenced the timing of the new deal. The delay on the part of Biden’s administration likely indicates the complexity of the deal, as noted Panjiva’s  research of Jan. 8, with buy-in from the U.S. steel industry likely needed in part to proceed. 

The deal has other measures as well, including statements on climate, labor and cooperation. Biden said in a statement, “It ensures a strong and competitive U.S. steel industry for decades to come and creates good-paying union jobs at home.” Another key component for American businesses is the lifting of the retaliatory tariffs set by the EU. Moving forward, other countries may be able to ride the momentum of the EU deal, including Japan and the U.K. The inflationary environment following the peak of COVID-19 in 2020 may also have been a factor, with prices for steel and aluminum increasing by 264.2% and 43.2% year over year respectively in Q3. This likely increased the burden of tariffs while providing better profitability to producers, making it easier to reach an agreement.

Steel and aluminium not immune from inflation

Chart shows steel and aluminium prices indexed to March 1, 2018. Source: Panjiva

Steel tariffs slice imports

The deal removes Section 232 duties on the first 3.3 million metric tons of steel imported from the EU, with quotas allocated by country based on imports between 2015 and 2017. Any imports above those levels will face the 25% duty. This is likely a compromise between the EU and U.S. steel interests, keeping steel imports at a relatively stable level with historical comparisons. The share of steel imports covered by the tariffs from the EU fell from 20.7% of the total in 2018 to 14.0% of the total in the first eight months of 2021. This represents a drop of 13.9% in Q2 2021 versus Q2 2019, the largest decline in imports for that period except for China. 

The largest importers of steel to the U.S. by value are Canada and Mexico, accounting for 41.0% of total imports in the first eight months of 2021 from a 29.1% share in 2018. The release of the two countries from tariffs in the USMCA likely set the stage for further growth, especially following the onset of the pandemic in 2020. Imports against 2019 increased by 88.4% in Q2 and 98.6% in July and August combined.

Exempted countries also saw increased volumes, with Brazil, Australia and South Korea increasing the share of imports associated with them to 20.3% in the first eight months to 2021 from 17.6% in 2018. Predictably, countries not exempted saw their share fall. Imports from China, for instance, lost 1.1 percentage points from 2018 to 2021. The rest of the world — divided into Asia excluding China, and all other countries — saw its share of the total fall by 4.7 percentage points and 1.8 percentage points respectively.

USMCA imports solidify post pandemic

Chart shows imports of steel under the section 232 rules by origin. Source: Panjiva

Panjiva’s  analysis of shipping records shows that all subject imports from the EU, reduced to the HS4 level, would have exceeded the quota in every quarter since Q1 2016, if not before. Administered quarterly, the 3.3 million metric tons breaks out to 0.825 million metric tons a quarter, with the ability to roll over up to 4% of the quota for the quarter into the next. Q2 2021 would have seen total imports by weight exceed the quota by 0.17 million metric tons, while Q3 would have come close at 0.02 million metric tons over. It is important to note, however, that the quota will be further subdivided by country within the EU, based on historical levels, and that may change which imports are actually free from the duty. This also could have the effect of shifting steel trade within the EU, especially if a country’s quota remains unfilled for multiple quarters.

EU hits steel quota every quarter

Chart shows imports of steel to the U.S. from the EU by month. Source: Panjiva

Importers that may benefit from reduced duties on steel include Thyssenkrupp and Voestalpine, both of which have kept importing from the EU despite the increased costs. Thyssenkrupp’s imports of steel by weight to the U.S. increased 26.9% in the third quarter versus 2019, having been 1.2% down in the second quarter. Voestalpine’s situation was the opposite, with third-quarter imports versus 2019 down 13.6% when they had been up 3.9% in the second quarter. Both companies have been able to keep imports up year over year despite tariffs, and they may be well positioned for a decrease in costs. Thyssenkrupp may have been anticipating some action to alleviate duties as well, with Panjiva research of Aug 8 noting an uptick in imports.

Salzgitter and Tubos Reunidos are examples of companies that may ramp up imports to the U.S. once the new quota is established, as both have reduced imports since the tariffs were introduced. Imports associated with Salzgitter in Q3 had fallen by 70.8% when compared to 2019, while imports associated with Tubos Reunidos dropped by 92.5% in the same period. The prospect of reduced costs to import their products into the U.S. may spark an increase in activity.

Thyssenkrupp imports rise through tariffs

Chart shows imports to the U.S. of subject steel imports at the HS4 level by company. Source: Panjiva

Aluminum duties lighten

The Section 232 tariffs on aluminum share much of the same story in how they originated and came to be. Set at a 10% duty, the burden on importers was less, and subsequently, the effects on trade activity were harder to see. In fact, U.S. imports of aluminum from the EU increased to 10.9% of total imports in 2019, the year after the duties were implemented, from 8.7% of the total in 2018. The pandemic tempered that performance, and in the first eight months of 2021, imports from the EU accounted for only 7.9% of the total value. Imports in July and August combined show that these levels were 26.5% lower than the same two months in 2019, the aforementioned high point, but indicate that the EU may have been looking to reverse that trend in agreeing to a deal. 

USMCA partners Canada and Mexico again took the top spot in U.S. imports of aluminum, increasing their share from 39.8% in 2018 to 50.5% in the first eight months of 2021. This amounted to a 49.0% year-over-year increase in July and August, with the bloc benefiting from the lifting of aluminum tariffs under the USMCA in 2019. The growth of imports from Canada and Mexico came at the expense of all other regions, with the share of imports from China dropping 1.9 percentage points from 2018 to the first eight months of 2021 and the share of imports from Asia excluding China and from all other countries dropping 3.6 percentage points and 4.3 percentage points, respectively. The new deal puts imports from the EU on an even playing field with those from Canada and Mexico, ignoring logistical differences, and that may benefit EU sources. 

USMCA leads aluminum import share

Chart shows imports to the US by value subject to Section 232 duties by origin. Source: Panjiva

The quota for aluminum imports will be administered differently than that for steel: semiannually, and limiting the first half of the year to 60% of the yearly amount. The limits are also divided into two buckets, unwrought and wrought aluminum. The unwrought quota is 18,000 metric tons a year, a number that is completely out of sync with the 135,600 metric tons imported from the EU last year. Part of the reason behind the carve-out might be considerations around protecting the domestic refining industry. Panjiva’s analysis shows imports from the EU in the first three quarters of 2021 were averaging approximately 14,200 metric tons a month.

The wrought quota is 366,000 metric tons a year, which may be more favorable to EU businesses, with related  imports in 2021 not reaching the 60% mark until June. Applying the quotas to 2020 shows similar results, with the 60% mark reached in June and the total quota filled in October. As with the steel quotas, the aluminum limit will be further subdivided to each country in the EU based on historical levels.

Wrought aluminum quotas hit in June

Chart segments imports of wrought aluminium products subject to section 232 duties reduced to the HS4 level by weight. Source: Panjiva

Thyssenkrupp reappears in the list of  aluminum importers, albeit showing a different trend. Imports linked to the company were down 88.5% year over year in Q3 and by 89.3% compared to Q3 2019. The metals firm is joined by Eastman Kodak, which saw Q3 imports decline by 43.0% year over year and by 68.2% from 2019.

Imports associated with Reliance, Constantia and Alro, meanwhile, increased in recent quarters. Reliance saw a 141.2% surge year over year in Q3, although that may have been partly due to the pandemic, as mass compared to 2019 fell by 6.4%. Constantia and Alro were more consistent with import growth, increasing by 59.2% and 19.0% year over year respectively in the third quarter, and by 43.4% and 36.9% respectively from 2019. These firms may be able to capitalize on reduced tariffs on their already active imports.

Reliance, Constantia flexible with aluminum tariffs

Chart shows U.S. imports of aluminum by weight associated with companies on a year over year quarterly basis. Source: Panjiva

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