Filing unfair trade cases is like chemotherapy. Both remedies are intended to protect the host from a serious threat, but there are side effects that are nearly as dangerous as the ailment itself.
Maybe that explains why US steelmakers have held off on filing dumping and subsidy cases against sheet steel imports for so long.
The market has been chattering about US mills filing government petitions for relief from imports since at least last August, but so far nothing has transpired.
The latest talk is that sheet trade cases will be filed in April – although there may be still some in the camp that believes a late February filing is possible as a not-so-happy New Year’s greeting to Chinese mill executives returning from the holiday.
The timing of a trade case filing is significant, as a key factor in the success of the litigation is proof of material injury, or the threat of material injury – and a big measure of this is red ink, or as the Brits call it, lossmaking.
It’s pretty hard to prove injury if you’re making healthy profits, and 2014 was a pretty good year for US-based sheet producers. Nucor reported 2014 net income of $714 million, up 46% from 2013, including fourth quarter net income of $210 million. US Steel had net income of $102 million, its highest full-year net earnings since 2008, and Steel Dynamics earned $157 million. AK Steel lost $97 million last year, but had Q4 net profits of $14 million.
An April trade case filing would presumably come on the heels of first quarter US mill losses. Since last August, bellwether hot-rolled coil prices have fallen from about $680 a short ton to about $500/st, a 26% decline. This coincided with a steady rise in HRC imports. From an average of 285,000 metric tons a month in the first half of 2014 to a second half monthly average of 366,000 mt. Licenses to import HRC in January totaled 476,000 mt.
Even so, US sheet prices are still at a premium to most of the world, which might also make it difficult to prove injury.
Imports routinely account for roughly 25-30% of US finished steel consumption. The filing of unfair trade cases usually affects only some foreign suppliers, and other offshore producers not under the shadow of the litigation may decide to take a run at the US market to fill in for the impacted volume of the cited countries.
In this way, unfair trade cases have had the unintended consequences of creating new foreign suppliers. This has been described as the “whack-a-mole” effect – when one country goes down, another country steps in to take its place. If domestic consumers get used to buying from these new suppliers, they may become fixtures in the market as well.
Global steel supply has also been described as a water balloon: if you squeeze it in one area, it bulges in another.
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Despite these problems, the incentive to file trade cases is strong. Trade laws were written in large part to keep foreign producers from dumping their products at below their home market prices, or their cost of production. The law is the only way to stop this dumping, lest domestic mills attempt tit-for-tat responses on price, which can lead – and has led – to a race to the bottom.
However, one of the reasons sheet prices have declined is because prices for steel mills’ raw material inputs – primarily scrap and iron ore – have declined precipitously as well. So, given that profit margins were likely maintained to some extent, at least some US mills may report Q1 profits in April.
US mills not only get a boost from the imposition of preliminary duties – in relatively short order from the date of filing – they can also get a boost from the mere threatening of trade cases, which can have a chilling effect on imports. There are unintended consequences to this sabre rattling as well: importers attempt to “game” the system by stocking up on foreign steel in advance of a trade case filing. That likely played a part in the surge of sheet imports last year.
US buyers now face a dilemma over stocking up on domestic sheet in advance of possible trade case filings. “Your choices are: make a big buy, load up in one-to-six weeks. If there is no [dumping] case, now you have [excess] material on the floor,” said one distributor. “If you don’t buy and there is a case, then you are going to start to see the [mill delivery] lead times push out and you are kind of damned if you do, damned if you don’t.”
The adjudication of a trade case can take more than a year – and the injury determination by the US International Trade Commission is the final say in the matter. In the interim, duties are put in place and importers must make cash deposits to cover these levies, which will be kept by the government if a final affirmative injury determination is made, or returned if there is a negative ITC ruling.
Bottom line? It’s a roll of the dice for all involved, lawyers are expensive, the arc of justice is long, and some believe mills may not file unfair trade case petitions after all.