Continuing its efforts to control imports of steel and aluminum, the U.S. government in March 2018 issued two proclamations to adjust the U.S. imports of aluminum and steel from all countries except Canada and Mexico. A 25 percent tariff is levied on steel and 10 percent on aluminum. Although targeted largely at China, the tariffs on a broader industry level may not impact China.
The U.S. is currently the largest steel importer. In 2017, the U.S. imported 34.6 million metric tons (MMT) of steel, a 15 percent increase from the 2016 levels. The top three steel exporters to the U.S. are Canada, Brazil and South Korea. Despite the recent trade restrictions from South Asian powers, China and Korea, the U.S. currently imports a significant portion of low-grade steel from China and South Korea. Canada is the top exporter of flat and long steel products to the U.S., while Brazil is the top exporter of semi-finished steel and South Korea is the top exporter of steel pipes and tubes.
The MRO industry comprises diverse subcategories such as PTB (power transmission and bearings), industrial supplies, PVF (pipes valves and fittings), electrical supplies, electronics and instrumentation, safety supplies, HVAC (heating ventilation and cooling), general MRO spares, and others. The impact of the steel tariffs on MRO product prices in the U.S. can be evaluated considering the cost structure of the different products. For products under the PTB, and electronics and instrumentation subcategories, the cost of engineering or precision is a lot higher in the overall cost of the final product compared to the cost of purchasing the steel. The impact of the recent steel tariff on these two subcategories is therefore minimal. For general MRO spares such as nuts and bolts, the steel used is primarily imported by the U.S. from Canada and Mexico and is of a high-grade quality. With the renegotiation of the NAFTA agreement expected in mid-April, production costs may be impacted for MRO spares and other subcategories of MRO for which steel is imported from Canada and Mexico. The subcategories that may be most impacted by the recent tariff hike are PVF and HVAC. The MRO products under these subcategories contain the steel purchase cost as a significant component in the overall cost of the final product.
Globally, the instrumentation and valves fitting market was valued at about $3 billion in 2017 and is expected to increase at a compound annual growth rate (CAGR) of 3 percent for the next five years. The U.S. metal pipe and valve/fitting manufacturing industry is valued at $31 billon and has about 1000 companies. The U.S. manufacturing supplier market is moderately consolidated, with the top 50 companies accounting for a 65 percent market share. The demand for the PVF industry primarily depends on the manufacturing and construction activity across chemicals, petroleum, utilities, water, and housing. With a strong emphasis on U.S. manufacturing by the Trump government, the tariffs may have a countereffect. A survey conducted by the American Supply Association involving manufacturers, distributors and retailers in the PVF industry shows that although the rise in steel tariff is expected to increase the demand and capabilities of the manufacturing base in the U.S., it may also increase the cost of production. Among all the wholesalers surveyed, 43 percent supported the tariffs, 42 percent did not support the tariffs and 15 percent were neutral. The results of the survey among PVF manufacturers in the U.S. were staggering — almost 100 percent of the manufacturers did not support the tariffs.
As in the PVF industry, the steel used in HVAC is imported from Asia (China, South Korea and India) to a large extent. The U.S. HVAC industry is expected to expand at a CAGR of about 7 percent over the next five years supported by increasing construction activity, connected homes, and wireless technology. The AHRI (Air-Conditioning, Heating & Refrigeration Institute), which is a body of manufacturers from the heating, air-conditioning, commercial refrigeration and water-heating products and equipment industries in the U.S., has also raised concerns over recent steel tariffs. The AHRI does not support additional tariffs on steel and aluminum due to concerns relating to their impact on manufacturers and consumers.
Buyers for the MRO category in the U.S. should take cognizance of the recent tariff trends and look for risk mitigation measures.