In 2021, shortages in the steel market—alongside rising demand—have resulted in significantly higher prices. The price for U.S. Midwest domestic hot-rolled coil (HRC) steel has risen about 215% in 2021.

And while it may be easy to blame the ongoing COVID-19 pandemic for supply-related complications, one can’t forget that the steel tariffs instituted by the previous administration back in 2018 have also had a big impact on the shortage of steel in the U.S. this year.

The subject is currently in the news because the current administration in the White House recently announced it would be rolling back some of the tariffs Trump had imposed on the imported steel market.

Background

Since it was first commercialized in the 17th century, steel has been essential in the development of human civilization. It’s difficult to imagine how the world would look today without steel.

But these days, steel also serves as a perfect example of the complications that come with a globalized economy.

For example, the steel sector changed dramatically when developing countries such as China and India started producing this valuable global commodity at a cheaper cost than many of their western competitors.

On one hand, increased competition contributed to a lower price environment, which was welcomed by consumers of steel (i.e. auto manufacturers, industrial builders, etc.). But on the other hand, lower prices and increased competition also resulted in smaller profits, and an overall decline in the size of the American steel sector.

In order to assist the American steel sector, the Trump administration instituted steel tariffs of 25% on all imported steel back in 2018. The goal was to help level the playing field for American steel companies, as the tariffs basically represent a price increase on foreign-made steel.

As is well known, however, every tariff creates winners and losers. And in this case, the American steel sector was the winner, while consumers of steel in the U.S. were the losers. Unfortunately, the latter group represents a much bigger piece of the American economy.

Recent Developments

On the last day of October, the White House announced that the U.S. had struck a deal with the European Union (EU) to roll back tariffs on steel imports coming from that region. For the time being, the steel tariffs remain in place for the other countries targeted by the previous administration—such as Britain, China, Japan and South Korea.

In exchange for the rollback of steel tariffs, the EU agreed to roll back the retaliatory tariffs it had instituted on products such as bourbon, motorcycles, orange juice and power boats.

Interestingly, however, the deal also includes a clause that effectively caps the amount of steel that can be exported from the European Union to the U.S.—known as a “tariff-rate quota.” That means once exports of steel from the EU to the U.S. reach a certain level in a calendar year, any further exports will be subject to a tariff of 25%.

According to the terms of the new agreement, the EU can export up to 3.3 million metric tons into the U.S. duty-free on an annual basis. Anything beyond that is taxed at a rate of 25%.

For reference, the U.S. imported 4.8 million metric tons of European steel in 2018, 3.9 million in 2019 and 2.5 million in 2020. The specifics of the deal make clear that the White House is attempting to find a better balance between steelmakers and steel consumers, in terms of winners and losers.

Moreover, it appears that the U.S. and EU also plan to try and collaborate more closely in the future, when it comes to positioning and negotiating with other major players in the steel industry (i.e. China).

The U.S. has long argued that corporate subsidies provided by the Chinese government artificially reduce the price at which Chinese manufacturers can sell their steel. This practice is known as “dumping,” and involves the export of a product at a price that’s lower than normal in the importing country.

Considering China’s negotiating power in the current global economy, one would think that the U.S. and EU will have an easier time achieving their respective trade goals by presenting a united front.

Next Steps

Now that the U.S. and EU have come to an agreement on the steel trade, it’s likely they’ll build on that success by resolving other differences—trade-related and otherwise. That could involve the rollback of other Trump tariffs.

It will also be interesting to see if the U.S. is able to successfully negotiate new trade agreements with other big steel-producing nations. The deal with the EU should serve to alleviate some of the complications associated with the current steel shortage, but it’s likely that other deals will need to be struck before there’s any meaningful relief in the market.

Steel prices have cooled off ever-so-slightly in recent weeks, with the price of U.S. Midwest domestic hot-rolled coil (HRC) steel now down to about $1,800/ton, from its 2021 high of roughly $1,950/ton.

On Nov. 1, shares in American steel companies were down modestly in the wake of the news. But the absence of a bigger correction serves as a good indication that the new deal doesn’t spell disaster for American steelmakers.

To track and trade the steel sector, readers can add the following symbols to their watchlists:

• ArcelorMittal (MT) – Luxembourg
• Nucor Corporation (NUE) – United States
• POSCO (PKX) – South Korea
• Tenaris (TS) – Luxembourg
• AK Steel (AKS) – United States
• Commercial Metals Company (CMC) – United States
• Gerdau (GGB) – Brazil
• Steel Dynamics (STLD) – United States
• US Steel (X) – United States
• Worthington Industries (WOR) – United States
• Reliance Steel and Aluminum (RS) – United States
• VanEck Vectors Steel ETF (SLX)

The list above includes the respective headquarters of each company to help differentiate U.S.-based producers from foreign producers—an important distinction with regards to the tariffs. Additionally, it should be noted that SLX is composed of both U.S.-based producers and foreign producers, and is trading about 17% below its 52-week high.

To learn more about a sample options trade in the steel sector, readers can tune into this previous episode of IRA Options on the tastytrade financial network.

For timely insights on everything moving the markets, readers can also tune into TASTYTRADE LIVE—weekdays from 7 a.m. to 4 p.m. CST—at their convenience.

Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to support@luckboxmagazine.com.