It’s a steel cage fight for product exclusions in the underground tariff wars

Steel consumers and producers in the US are duking it out.

The battle is mostly under the radar and in the back rooms and alleys surrounding the Trump administration’s chaotic trade policy.

Tariff headlines tend to concentrate on the alienation of allies and Canadian Prime Minister Justin Trudeau’s “special place in hell.” However, aside from all the grappling amongst trading partners, day-to-day steel consumers are digging in to the US government’s harmonized tariff schedule in an attempt to maintain supply chains.

There are two categories of steel imports now in the US, those subject to the 25% Section 232 tariffs and those that are not. Non-tariff steel is coming from a small number of countries that have reached quota deals with the US -- South Korea, Brazil, Argentina and Australia.

If you are an American steel consumer and sourcing material from anywhere other than these four countries, the only hope of avoiding paying the 25% tariff is to request a product exclusion. All a company needs to do is provide enough evidence that there is not sufficient production available in the US, or that the steel is needed for specific national security applications.

So far, the US Department of Commerce is wading through about 20,000 steel product exclusion requests. It has been able to post over 8,000 for a comment period, rejected another 2,000 and still has about 9,300 pending. The requests are more than quadruple the 4,500 Commerce expected to be filed.

Still, Secretary of Commerce Wilbur Ross assured the Senate Finance Committee Wednesday there was no need to worry, that the agency he heads is diligently working through the backlog. The department is set to release decisions on 98 requests, or about 0.5% of the total, this week.

Ross said Commerce is accelerating the process by immediately approving requests that are submitted correctly and have no objections against them.

The problem is, domestic steelmakers’ opinions are markedly different to those of their consumers on the criteria for an exclusion. Specifically, how readily available domestic supply is, and no one really knows what the specific national security considerations entail. The national security oriented Section 232 case is not limited to the needs of the Department of Defense, but to national interest in general.

The exclusion requests have generated about 4,000 objections from other domestic consumers and suppliers.

Semi-finished steel slabs are one of the most hotly contested product groups causing a split between domestic producers and consumers. US companies whose business model is based on rolling slabs into finished flat steel all rely on slab imports.

Brazil has reached an export quota deal with the US, but other major slab exporters have not. Slabs from Russia, Mexico and Japan are subject to the 25% tariff, a situation that could seriously impact companies like NLMK, Evraz, ArcelorMittal/Nippon Steel Calvert and California Steel Industries unless exclusions are granted or supply chains are retooled.

In an interview with S&P Global Platts at the end of March, NLMK USA CEO Bob Miller estimated that paying a 25% tariff on slab could tie up $60 million-$75 million during the estimated 90-day product exclusion process.

US flat-rolled steel producers have been objecting to the companies’ exclusion filings, arguing there is enough slab supply domestically should idled steelmaking capacity be brought back online. Over the last few months, US Steel announced the restart of two blast furnaces at its Granite City Works in Illinois and AK Steel is still sitting on an idled furnace at its Ashland Works in Kentucky.

The objections to NLMK’s filing say the company has access to domestic slab, but continues to rely on imported slab to maximize its profits. Before the Section 232 investigation, a company maximizing profits did not seem like such a crazy idea. But under a broad definition of national security, US steelmakers with underutilized production capacity are crying foul. It is becoming a patriotic duty to cast that slab in the US even if it is to supply a competitor. Still, it remains to be proven whether this would occur at a rate high enough that said competitors would be competitive or at a price level that would allow the suppliers to maximize profits.

“Thus, it is clear that NLMK’s product exclusion requests are designed to eviscerate any benefit the 232 [tariffs] could have for the US industry and are indicative of intentionally malicious actions by NLMK to damage American steel producers and their workers,” US Steel said in its objection to NLMK’s slab exclusion requests.

NLMK is seeking around 85 different tariff exclusion requests for some 3.5 million st of slab, well above the steelmaker’s historical slab consumption.

The size of the request is raising red flags for other domestic steel producers too.

However, Miller described the additional tonnage as a function of the Department of Commerce’s filing requirements. Product exclusion requests are made on a narrow HTS code basis and are required for every specification.

“When we first filed [exclusion requests] on tariffs, we used the codes for what we historically brought slabs into the country under,” Miller said. The initial submissions resulted in just six filings, but due to the narrow HTS definitions the company ended up filing around 85.

Also, NLMK USA filing for more tons than historically needed is a result of exclusions being awarded on an individual product basis and the company being unsure what, if anything, will be excluded. It is an attempt to ensure flexibility for supplying customers, according to Miller. “I have no plans of bringing in slabs and reselling them if that is what they are insinuating,” Miller added.

So, with all of this playing out publicly, the end result is still uncertain. Steel consumers remain in a “bureaucratic twilight zone,” waiting to see if the products they import will escape the tariffs, according to Senator Ron Wyden, Democrat-Oregon. Many of them will not. There is a high probability a number of the requests will be rejected, Ross said, but consumers are expected to keep fighting.