There won't be a TACO this time

Landscape overview

The acronym TACO which has been in the news recently stands for "Trump Always Chickens Out." However, when it comes to steel, I don't think we will be eating tacos.

If I were to look at our recent orders and current landings, I imagine buyers have healthy levels of inventory. On bookings in our US port markets, we saw a spike in activity towards our Gulf pipe manufacturer partners. Asian sources of pipe have taken a premium price approach while they understand how to operate under a new tariff structure.

Specific countries such as South Korea, Canada, and Mexico are new to the tariff party. I believe if these countries' local currencies can weaken against the US dollar, then they should be able to continue to sell into the US markets. A key component to import steel in the US and Canada will be the price at which the US and Canadian mills decide to sell at. If the North American mills move up prices with tariffs, then imports continue to enter.

I believe US steel mills will raise prices sharply with tariffs on all import steel going to 50%. I think Canadian mills will follow suit. I also believe Ottawa can no longer stay idle and will implement a 50% tariff on all import steel to Canada as well. This is going to have a domino effect on other countries as well. Look for further protectionism from Europe, India, and Turkey.

I want to be clear: if you have import orders that have not landed, you are being asked to pay more to cover the new tariff. Please consider every steel buyer is being asked the same. Tariffs are a level playing field. Relationships with vendors, customers, and mills are strengthened when historical events like this happen.

I know there is a lot of debate on the semantics of whether tariffs are inflationary or not. In my simpleton view, the tariffs will increase the price of steel across the board for every distributor, whether they buy domestic or import. This will drive up the price of real estate, energy, commercial, and industrial projects across North America, which will weaken an already downward demand cycle. We will be buying less steel, but the steel we do buy will be expensive.

The best price won't always be the right price in chaotic environments.

Quick shots

• Raw material input costs to steel production spot prices are all very low when looking at historical pricing. I would expect we will see a rise in coke, iron ore, and scrap soon, which will impact HRC.
• Freight rates have been steady, outside of the China-US lanes increasing due to tariff shipment timing from Chinese exporters. Keep an eye on US implementing port fees for Chinese vessels. This will impact $/ton of steel freighting on water.
• US 50% steel tariff, when implemented, will send buyers to domestics fast. Domestic order books will fill, and lead times and pricing will increase. Then buyers will pivot back to import pricing when the new spread in pricing is there.
• Look out for new tariffs from Canada, Europe, Turkey, and India. This will impact places for Chinese steel to go, accelerating the production destruction of Chinese steel production in the short to medium term.
• If the USD dollar can stabilize and the bond market can calm, then we should see CAD weaken again. I believe this recent strength in the Loonie is a head fake. Oil is down, tariffs are up, our real estate is fragile. There is no hard backing for Loonie strength.