Washington Insider -- Thursday

Tariffs and Steel Industry Jobs

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

US Ethanol Could Be Part of US-China Trade Resolution

The US could send 300 million gallons of ethanol to China in 2019 if the trade war between the two countries were to be resolved, Mike Dwyer, chief economist at the U.S. Grains Council, told the Iowa Renewable Fuels Summit.

Dwyer said exports to China could reach one billion gallons in 2020 as the country expands ethanol use.

A group of U.S. agricultural interests, including the Iowa Renewable Fuels Association, and others while in China met with US Ambassador to China Terry Branstad in September, Kelly Nieuwenhuis, a member of the Iowa Corn Promotion Board, said. The group also met with Cofco and Sinopec, Dwyer and Nieuwenhuis said.

“China is the one market” that makes agricultural interests “salivate,” Dwyer noted. In talks this week, U.S. officials are expected to urge China drop its anti-dumping and countervailing duties on distillers' dried grains.

USTR Details Changes Needed To US Law Due To USMCA Ag Provisions

Changes required to U.S. law in implementing legislation for the US-Mexico-Canada Agreement, including several provisions concerning agriculture, were detailed by U.S. Trade Representative (USTR) Robert Lighthizer.

Lighthizer provided the information in a letter to Senate Finance Committee Chairman Chuck Grassley, R-Iowa. USTR is required to provide a list of legal changes associated with new trade agreements within 60 days of their signing.

USTR noted several legal adjustments needed for changes associated with agriculture. In exchange for greater market access for U.S. dairy, poultry and eggs in Canada, the U.S. agreed to give additional market access to Canadian goods. It agreed to eliminate tariffs and create new tariff rate quotas (TRQs) for certain Canadian ag products including dairy, sugar, peanuts and cotton. To implement those changes, Congress must pass legislation authorizing the new tariff treatment and TRQs.

Implementing legislation will also have to account for modifications to duty drawback policy included in USMCA. Specifically, the accord expanded an exception to drawback provisions for sugar to also include sugar containing products, USTR said.

Another change has to do with the application of Special Agricultural Safeguards (SSGs) provided for under the World Trade Organization's (WTO) Uruguay Round Agreement on Agriculture. Under SSG provisions, WTO members may impose additional tariffs on ag products when imports exceed certain levels, but unlike traditional safeguards countries to not have demonstrate the imports are harming or threatening to harm domestic industry.

Washington Insider: Tariffs and Steel Industry Jobs

There is considerable interest these days in examining the impacts of various trade policies, including tariffs on the affected industries. This week, Bloomberg is reporting that a visit to an Indiana steel plant “helps explain why the much-ballyhooed steel tariffs promoted by the administration have so far been a bust for the steelworkers.”

The plant visited is a 30-year-old factory with the ability to shrink or expand production at will, depending on demand by customers, “while employing pretty much the same number of workers,” Bloomberg found.

Thus, the report concludes that plant flexibility is why, as the first year of the recent steel tariffs comes to a close, the US industry’s biggest players are enjoying increasing demand and revenue but adding few of the jobs promised during the campaign.

“They’re expanding production, demand is really strong in the country, and crude steel production will rise as imports remain low, but they’re not hiring much,” says Cicero Machado, a steel analyst at metals researcher Wood Mackenzie. The firm forecast that the number of US steel jobs barely budged last year despite a bump in output from the tariffs.

The number of employees at the country’s iron and steel mills has tumbled 53% since 1990, to 87,700 in November 2018, according to the Bureau of Labor Statistics, whereas U.S. steel production dropped only 2.2% in the same period, according to the World Steel Association.

Throughout the recent presidential campaign, voters in industrial battleground states such as Ohio and Indiana were promised trade policies “that would spark a revival in steel jobs.” In February 2018 the Commerce Department determined that steel imports threaten the viability of the American steel industry, endangering US national security and the administration recommended a 24% tariffs on imported steel.

This policy was expected to boost capacity utilization among domestic producers to 80%, from about 74%. Nucor Chief Executive Officer John Ferriola told Bloomberg in May that an 80% capacity utilization level was “the minimum needed for the industry’s long-term financial health and viability.”

The tariffs, which have made imported steel more costly, are having an impact. The American Iron and Steel Institute reported that average capacity utilization industrywide touched the 80% level in the first week of 2019, up 7 percentage points from a year earlier. That’s one reason analysts expect US Steel Corp. to report a 175% jump in 2018 profit, to $936.2 million, on Jan. 30.

Yet Wood Mackenzie predicts that while steel production rose 4%, the total number of American steel jobs increased just 1% in 2018. “I was expecting much more jobs to be created,” Machado says.

One reason for the employment sluggishness is that producers remember the pain suffered after the financial crisis and the subsequent collapse in commodities demand, which precipitated massive cost cutting and significant job losses. So as they enjoy today’s tariff-induced boost in demand, many firms are selling the excess capacity at their underutilized plants while keeping a lid on payrolls.

Nucor, for instance, says it has more than enough current employees at its Crawfordsville plant to keep the factory running around-the-clock, and it has no plans to add workers.

Growing productivity among American steelmakers is another reason they can do more with the same number of — or fewer — employees. US workers produced about 478 tons per person in 1990, when about 185,400 people worked in the industry. By 2018, production had hit almost 1,000 tons a person, with 87,700 workers in the sector. This means that in less than 30 years, steelworkers have become twice as productive.

However, analysts are skeptical that domestic steelmakers would make long-term capital expenditures solely on the basis of trade tariff policy. “I think the steel companies are looking at expansions as a multiyear thing, and they see free cash flow the next several years, and they’ve been looking to reinvest. So, they’ve got multiple motivational factors supporting that decision,” says Woodworth at Credit Suisse.

Another factor Bloomberg mentions is that while employees haven’t benefited much from the administration’s policy, “surprisingly, neither have shareholders.” The price of steelmakers’ stocks tumbled last year. For example, Nucor stock price fell about 19%, its worst annual decline since the Great Recession. US Steel’s fell 48%, and AK Steel’s dropped 60%.

As producers boosted capacity utilization to 80%, investors worried the increases would result in too much supply for an economic cycle that’s peaked. Adding in new plants, Keybanc Capital Markets estimates that about 10 million to 15 million more tons of annual capacity will come online over the next three to five years, or about a 15% increase from 2018’s total production.

“The reason why investors hate the industry right now is they hate those numbers,” says Phil Gibbs, a steel analyst at Keybanc. “To fulfill that supply gap, you’ll need more import displacement [replacing imports with domestic-made steel], a stronger economy, and you’ll probably need some infrastructure spending. It’s why steel investors haven’t responded in kind and don’t want to have anything to do with the sector.”

The highly controversial political objectives of intervening in major industry investment trends appears to be raising important questions that have been largely ignored in the past. Over the coming months, a number of economic and trade policy decision are likely to be debated, fights producers should watch closely as they emerge, Washington Insider believes.

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