May 07 | 2020
US Charges Drag Down Breakbulk
By Malcolm Ramsay
BREAKBULK MAGAZINE ISSUE 3 / 2020 – CARGO LENS – As the global economy reverberates from unprecedented disruption in the first half of 2020, breakbulk operators handling steel products in the U.S. face a series of additional structural issues as a result of the latest round of import tariffs imposed by the White House.
Originally introduced under Section 232 legislation in 2018, the tariffs were designed to stabilize capacity utilization for domestic producers, but as of the beginning of 2020 had largely failed to boost domestic output. As a result, President Trump announced a renewed round of tariffs on Jan. 24, increasing tariffs on certain derivative steel products by an extra 25 percent, and aiming to drastically reduce the country’s reliance on cheap Chinese steel.
These new charges, aimed primarily at high-content steel products such as steel nails and car bumpers, created further bureaucracy for breakbulk operators. And while the long-term benefits for the U.S. steel industry still remain uncertain, the impacts for the breakbulk sector are already being felt.
“The tariffs implemented in late January 2020 on steel derivatives and aluminum products will be felt across all parts of the industrial sector in the U.S. as the cost of raw construction materials increase. The U.S. breakbulk industry has suffered a decline ending 2019 and beginning 2020; one would have to believe that the current tariffs could be a contributing factor,” Jennifer Thornton, vice president, global projects and business development at project carrier BBC Chartering, tells Breakbulk.
The latest round of steel tariffs included an additional 25 percent ad valorem rate of duty on derivative steel articles, with a further 10 percent ad valorem rate for derivative aluminum articles. Exemptions to steel charges were announced for Argentina, Australia, Brazil, Canada, Mexico and South Korea, while only Argentina, Australia, Canada and Mexico were saved from the additional aluminum duties.
“The changes have already been ongoing for a while, and we have seen some carriers that have based some of their trade on steel base cargo struggling or out of business. As there is still a need for steel on a worldwide basis, the supply will continue but perhaps from smaller manufacturers and more scattered locations. The longer the trade tensions and tariffs persist, the more likely the purchase patterns are going to be changed indefinitely,” said Michael Morland, general manager of AAL Americas.
Delay of Duties
The stringent new steel tariffs had been expected to bite in the first quarter of the year, but the devastating impact of the Covid-19 pandemic has thrown chaos into the mix, as much of the world’s economy entered shutdown mere weeks after the White House announcement.
In late March, the U.S. Customs and Border Protection announced that it would offer “additional days for payment of estimated duties, taxes and fees,” sending uncertainty through the steel sector, with a group of five leading U.S.-based steel industry associations expressing concern.
“Any efforts to delay or reduce the collection of duties on unfairly-traded steel imports or imports that threaten to impair U.S. national and economic security will ultimately hurt U.S. workers and businesses during this unprecedented moment,” the steel associations stated in an open letter, adding, “certain major steel-producing nations continue producing steel despite softening demand that occurred before the pandemic even began,” and highlighting the “critical” importance of domestically sourced steel to U.S. national and economic security.
From a breakbulk perspective the benefits for domestic industry are not so clear-cut. As Morland notes: “Major local producers like Nucor and Bethlehem have limited ability to scale up production based on short-term changes. There will most certainly have been an increase of prices, based on limited availability of domestic steel, but there is no chance that these local producers could pick up the volumes lost in imports.”
Tariffs have had an effect on domestic production, with steel imports down 10 percent in January 2020 compared with January 2019, according to the American Iron & Steel Institute, or AISI. Local production is up 5 percent to 6 percent year-on-year. But the shift is nowhere near enough to cover the volumetric gap in steel needed. For full year 2019, the AISI reported finished steel imports had plunged 18 percent to 21 million tons.
Analysts at Clarkson Research meanwhile noted that Chinese steel production last year recorded its first year-on-year decline since early 2016.
This has meant that the brunt of the tariffs has largely been felt by projects requiring steelwork, and for breakbulk carriers this has been widely related to EPC work in the oil and gas sector, an industry in the U.S. that is now reeling from record declines in oil prices.
“The changes have more been of the nature where U.S. EPCs have shifted production to Southeast Asia, India, Brazil or EU where tariffs have been less. Local production is still too expensive compared with imports to be a viable source, yet specialized steel companies with local production have benefited. I have had several conversations with EPCs and asked them if they have been considering domestic vendors, and I have not had a single one confirm that they have made this switch due to price differences,” Morland adds.
Another direct outcome of the new tariff environment has been an effort by manufacturers to shift production of largescale components to different regions to avoid severe charges, resulting in fabrication of some major breakbulk items shifting away from China.
“There has been a change in manufacturing location for module manufacturing,” notes Morland.
“There has been a significant drop-off in production and volumes, both in structural steel and raw steel material from China that has been moved elsewhere. This has resulted in different ports being called, and also our service model adapted to suit the new environment.”
Europe has taken up some of the slack, shipping more steel to the U.S. compared with previous years, but this also comes at a price due to the higher production costs in Europe over China.
The U.S. economy is unlikely to bear higher costs in the long term, as the repercussions of its record US$2 trillion Covid-19 package are felt. As yet, not all the impacts are likely to be apparent, given the necessary lead time for many larger items to enter the global supply chain.
“With the situation between China and the U.S. over the past year, we have seen the immediate effects in the container and bulk industries, but when it comes to the heavy-lift industry, I believe we will only see these effects come towards the end of this year due to the lead time of producing such materials,” said Tim Kopfensteiner, chief chartering officer at BBC Chartering.
Despite the supposed boost for U.S. steel producers, markets have so far responded unkindly to the latest round of tariffs, with all leading U.S. steel stocks trading far below the price levels when tariffs were announced. This has in part been led by a fall in China’s steel sector, in the wake of the Covid-19 outbreak, indicating the central role the Chinese steel industry now plays as a barometer of the global steel industry and the delicate link between U.S. and Chinese markets.
Global Tensions at Play
This close interplay between the major economies is one reason why the current U.S. tariffs seem unlikely to deliver any concise results in the short term, and uncertainty over the ultimate outcome of these measures is feeding into the breakbulk sector. With the long-term picture clouded by political tensions, potential knock-on effects of a looming global recession, and the U.S. preparing for presidential elections later in the year, breakbulk operators are understandably cautious in predicting any resurgence of activity.
“Geopolitics we feel is something that is very much forgotten in the breakbulk sector, as it has been a very spot driven market over the past few years, but it does play a very important role in the overall industry,” Kopfensteiner said. “It will be a very volatile market” for the rest of the year due to further political jockeying. For the breakbulk industry “we are likely to only feel the effects 12 months later.”
Morland of AAL concurs: “As for the steel tariff forecast, this is anyone’s guess with the current U.S. administration. However, wise money might be on a trade deal being finally struck with China in time to affect the election results positively for President Trump. That would be a great win and Trump would build a case for re-election based on that.”
If that is the outcome, Morland predicts that steel production volumes would again start shifting towards China, however this is dependent on projects forecast to go ahead in the U.S. LNG sector.
Volatility the New Norm
At present, U.S. LNG export projects are projected to account for significant breakbulk demand over the next few years, but their development has largely been predicated on record growth of the domestic shale gas industry. As sub-US$30-per-barrel oil prices appear to potentially extend into the medium term, the basis for many of these major LNG projects is beginning to look shaky.
“The project forecast for the U.S. is relatively strong for the next two to three years with LNG developments, but there is not a very strong backlog of projects after that period. If the project steel slows down, this affects the volumes overall and again the breakbulk and MPV sector thereafter,” Morland says.
This highly volatile situation – where even the biggest projects remain semi-permanently in the balance – is likely to severely dampen demand. As BBC’s Kopfensteiner notes: “As of now, it is difficult to say how this is, or will be, affecting the breakbulk industry at large. We feel the major effects of tariffs are still to be fully seen as with the tariffs ever changing, we are seeing sourcing change month to month, which we feel will be the situation for the next year.” And depending on the election, it could be years to come. Of course, steel will continue to move, but the point of origin will fluctuate.
Given the chaotic markets that have followed the latest round of steel tariffs it is still too early to determine any real effect, but the move towards tightened restrictions and greater trade friction is not positive for any boost in volumes.
“Significant supply chain changes have already been made, and will not be immediately reversed,” Morland says. “Coronavirus will not have helped the Chinese manufacturers either in the first quarter of 2020, as labor has been hard to come by. Resuming business as usual after coronavirus will be the thing to watch, both on the Asian side for shipping, but also on the U.S. and EU sides for receiving.”
For many breakbulk operators, the impact of steel tariffs is likely to be overshadowed by current supply chain disruptions, as longer-term shifts in production are more reactive and less planned out. For BBC, changes in demand are already leading to adaptations in its global shipping routes as the firm considers new opportunities in the Gulf of Mexico.
“We will continue to focus on our current U.S. partners and their core industries, such as steel,” Thornton of BBC said, but adds that “at the same time, BBC has launched a new trade lane in the Caribbean that includes Trinidad, Guyana, and Suriname to capitalize on changes in the business climate in the region.”
Based in the UK, Malcolm Ramsay has a background in business analysis and technology writing, with an emphasis on transportation and ports.