Duty on imports of steel and aluminum goods under Section 232 of the Trade Expansion Act of 1962 establishes a 25 percent tariff on certain steel products. The rationale behind the imposition of the tariff was to reduce the staggering $568 billion trade deficit of the U.S., which is particularly steep with China. The introduction of the tariff was contemplated to be a protectionist measure adopted by the U.S. that provides pricing power to the domestic players to level the field.
Construction and Equipment Industry Worst Impacted
Steel is a major raw material across industries. The increase in steel prices would impact industries such as construction, automobile, machinery/equipment, appliances, defense and energy. Construction and capital industries would be impacted the most, as they collectively account for more than 50 percent of the total steel consumption in the country.
The higher price of steel after imposition of tariffs will result in a $7.5 billion increase in construction prices in 2018. The total cost increase due to the 25 percent steel tariff levied on the cost of raw steel is about 0.6 percent of the total cost. From HVAC units to overhead costs on excavators or heavy equipment, there would be a further increase in the construction cost by 1 percent or more.
Construction and Capital Industry Outlook
The use of steel tube and pipe materials in construction has increased by 13 percent in May 2018 as compared to last year. Similarly, the fabricated structural metal has increased significantly by ~14 percent. Steel accounts for about 10 percent of equipment manufacturers' direct costs.
The price of steel has already risen in anticipation of the administration’s actions, and a tariff will only further erode the progress made by the construction and capital Industry over the past years. As per the Trade Partnership study, it is estimated that five U.S. jobs will be lost for every job saved in the steel industry by the proposed tariffs, as steel manufacturers in the U.S. employ far fewer people than downstream industries. Employers in other industries are going to have to pay more for materials, making their products costlier and less competitive. This will force them to cut jobs. Construction and machinery markets are expected to eliminate approximately 5,000 and 30,000 jobs respectively.
The U.S. President has the flexibility to increase or decrease the tariffs on a country-by-country basis. This flexibility has led to uncertainty in the market, which in turn has resulted in unique challenges when it comes to risk mitigation and cost shifting. Following are the short- and long-term impacts:
- Equipment manufacturers are planning to manufacture in their existing facilities outside the U.S. to avoid increased raw material prices, as the required steel types are not available with U.S. steel mills.
- Construction projects will be expensive, as manufacturers are attempting to pass the increased raw material costs to the builder, due to which the commercial buildings will need to increase leases.
- The uncertainty will increase the level of risk that contractors and subcontractors encounter when bidding on projects. Intermediaries may increase price to minimize vulnerability due to price fluctuations until the time the contract is awarded. Contractors are considering to file for tariff exemptions. As of June 28, 2018, over 22,500 applications for exemptions have been filled.
- With domestic construction becoming costlier, companies such as DowDuPont are considering locations outside the U.S. for their next major investments.
- The present level of construction across the U.S. will continue to remain strong through the remainder of 2018 and into 2019. This volume of construction is expected to level off and slow down beginning 2019 to early 2020. Once this happens, the demand should reduce, effectively alleviating price pressure points for steel as well as other materials.