Forward Buying Won't Ease All Tariff Uncertainties For Firms
After the Trump administration finalized late last month tariffs on imported steel and aluminum, based on what it termed national security considerations, some developers and contractors began to rapidly award structural steel contracts in what at least one fabricator said was an attempt to avoid even higher steel costs in the future.
Following President Donald Trump’s March 9 move to impose tariffs under Section 232 of the 1962 Trade Expansion Act, the administration negotiated with countries for exemptions to across-the-board levies of 25% on steel and 10% on aluminum. But on May 31, the U.S. Commerce Dept. said it could not reach deals with Canada, Mexico and the European Union.
FJM Ferro Inc., a Brooklyn, N.Y.-based steel fabricator and erector working mainly in the New York City region, immediately saw an increase in orders, said CEO Joe Casucci. In early June, he told American Metal Market (AMM), an online source for U.S. metals pricing and market trends, of “quite a few” immediate contract awards. “People have been very concerned that this steel gets released immediately as opposed to the prototypical drag that happens when you’re bidding a job,” he pointed out.
After the initial Section 232 enforcement announcement, U.S. steel-beam mills announced two price hikes—$45 per ton and $35 per ton—for most beam products, said AMM, following a $20-per-ton surcharge for floor stock in early April.
FJM Ferro used to be able to hold its bid and steel prices for 30 to 60 days, but market uncertainty now allows it to keep prices firm for only 15 days, said Casucci.
Construction firm executives and estimators are feeling the same anxiety in trying to build supply-chain strategies to meet project deadlines with the mounting uncertainties on material costs. Trent Wachsnicht, senior vice president and group estimating manager at JE Dunn Construction, Kansas City, Mo., notes that with rapidly changing government pronouncements that include counter-tariffs from affected exporting countries, “it’s a bit early to have a solid strategy in terms of how you’re going to manage [this], because product categories that are tariffed are changing, too.”
He says the company is monitoring tariff risks for key materials products to determine “how we’re advising our clients and our business partners in terms of design.” Wachsnicht says the process has forced JE Dunn to strengthen its supply chain-management focus to ensure it has enough purchasing options beyond one or two countries or a limited number of suppliers in any project locale.
More Tariffs? More Uncertainty
Commerce announced on June 20 the first Section 232 exclusions on steel and aluminum, affirming 42 exclusion requests from seven companies that import steel products from Japan, Sweden, Belgium, Germany and China.
The department also announced tariffs on a wide range of Chinese products separate from the Section 232 steel levy, and a preliminary antidumping determination that Chinese aluminum alloy sheet metal was sold in the U.S. at 167% below fair market value. The uncertainty is causing some contractors to play a wait-and-see game with purchasing.
Ryan Moss, project manager for McCarthy Building Cos., says the firm is “still figuring out final costs for the specialty steel,” which “has not allowed us to place orders for a majority” of a $280-million multibuilding campus redevelopment at Washington University in St. Louis. “It looks to be around a 20% impact at this point, plus an added four to six weeks of additional fabrication, but still to be determined,” he said, not expecting a clearer picture until early August.
Exemption and Exclusion
Industry trade groups have petitioned Commerce for more clarity on when new tariffs could be levied and how to expedite exclusion applications. While more than 20,000 petitions for exclusion have been filed to date, only 91 have been ruled on. In a June 20 appearance before the Senate Finance Committee, Commerce Secretary Wilbur Ross said the department would launch another investigation of companies that are possibly illegally inflating prices. But he did not assuage construction and manufacturing industry concerns about whether the department had the manpower to quickly expedite tariff exclusion disputes.
“There’s no reason for tariffs to increase the price of steel by far more than the percentage of the tariff, and yet that’s what has been happening,” Ross said at the hearing. “That clearly is not a result of the tariff, that’s clearly a result of antisocial behavior by participants in the industry.” Benchmark U.S. steel prices have risen nearly 40% since the beginning of the year, and steel manufacturers say they are only charging market rates.
“A few of the tariffs have actually taken effect, and many more have been threatened and may come about very soon, but as we’ve seen in the past three months, some of those deadlines got pushed back or eliminated,” says Ken Simonson, chief economist for the Associated General Contractors. He points to contractors that have to “prepare a firm bid now and wait until they know if they’ve locked in the price to then go out and buy the materials.” Firms are “really rolling the dice more than usual on what [project] costs are going to be,” adds Simonson.
“Clear as mud,” says Mark Luegering, chief operating officer at Cincinnati-based Messer Construction. “We know the risk and we share that risk with our customers and our subs and we price our work accordingly to try to cover it.” He says while contract terms offer some shield from risks “specifically driven by these tariffs, we have added language to protect us.” Adds Luegering: “Owners have to own that risk if they want to move forward with these projects.”
General contractors looking to buy their steel supplies moving forward face a challenge, but Simonson says the fact that U.S. construction markets are still mostly growing could be a silver lining for many participants.
Other industry experts agree. “While we still see the occasional price increase, we believe that structural steel prices are starting to stabilize on the shape side of the business, and that comparatively speaking, prices are still below the highs that we saw in 2012,” says Charlie Carter, president of the American Institute of Steel Construction (AISC), which represents steel fabricators.
End Game: Free Trade?
Carter also noted that with tariffs now in effect for Canada, Mexico and the EU, his association expects to see additional levies on fabricated steel imports. Currently, there only are tariffs on mill-produced steel.
The inclusion of Mexico and Canada in the tariffs helps to solve a transshipment problem. Steel produced by mills in China and other countries with large production capacity is shipped to third countries, including NAFTA partners, for fabrication into construction products such as beams and joists that are then shipped to the U.S. market.
Having no tariff on fabricated products hurts domestic structural steel fabricators as prices of fabricated products increase domestically while the tariffs applied to raw steel do not affect foreign fabricators’ imported finished products.
David Zalesne, president of Columbia, S.C.-based Owen Steel and current AISC chairman, says that further action from the administration will be necessary as it continues to refine its array of tariffs and other trade enforcement methods, even if doing so would create further uncertainty among buyers.
“My personal feeling is that it is unlikely this administration will tolerate end-runs around its signature trade policy for long, and that it will act to address the [non-tariffed foreign fabricated steel] issue at some point, which hopefully is soon,” Zalesne says. “Once that loophole is closed, there will still be plenty of domestic fabrication capacity to ensure that pricing will be competitive … among domestic fabricators on a level playing field.”
Ross echoed that sentiment at the Senate hearing, telling skeptical senators that “the purpose of [tariffs] is to get to an endgame that’s far closer to free trade than what it’s been before.”