By James Duff, Nicholas Tolomeo, Peter Brennan and Alisdair Bowles

March 17, 2018 - The implementation of a 25% steel import tariff by President Trump under section 232 has left participants in the Atlantic Supramax market scrambling to determine its impact on freight, as steel and steel scrap flows play a crucial role in underpinning rates in the Atlantic.

With 67% of U.S. steel produced by electric arc furnaces -- which melt scrap as the primary feedstock to make steel, as opposed to the iron ore and coking coal that are prevalent in blast furnaces -- a number of participants have expressed concern that firming domestic steel prices could stall scrap exports from the U.S., trimming ton-mile demand.

In the Atlantic, a shift in scrap exports would mainly affect the U.S. East Coast, which accounted for nearly 5 million mt of scrap exports in 2017, compared with around 500,000 mt of scrap from the U.S. Gulf Coast, principally from Houston.

A reduction in exports from the U.S. East Coast would have a material impact for Supramax freight in the region, as these vessels are unable to compete with their larger Ultramax and Panamax cousins for the other key cargoes in the area, namely coal and wood pellets, due to their more favorable economics.

However, the impact here is likely to be limited, due to logistical limitations of moving material from the densely-populated scrap generating U.S. Northeast to inland EAFs. Railcar availability has been limited and expensive for many U.S.-based scrap suppliers and the additional burden of moving coastal material to major EAFs in the Midwest and Southeast would further complicate matters.

Currently it would cost about $35/mt to move East Coast scrap into Ohio, the closest via rail compared to U.S. East Coast bulk freight rates to Turkey that have averaged around $23/mt this year. There is also the inconvenience of shifting operations from loading bulk vessels to pivoting and loading smaller rail cars.

For a coastal scrap supplier deciding whether to ship material to an export terminal or a domestic mill, in addition to finding available rail cars, they would also consider that U.S. mills typically have less favorable payment terms than East Coast exporters. Adding all of this together could still create a situation where U.S. East Coast scrap flows to its main buyer Turkey, even if the Turkish price is below the U.S. price. 

In the steel markets the impact is likely to be more severe, however. The U.S. imports vast quantities of slab steel from Brazil, rebar from Turkey and heavy section steel, rebar and merchant bar steel from the UK-Continent, all of which are likely to be displaced by U.S. production as a result of the 25% tariff.

Although Turkish mills, strategically placed on the water, are very competitive for scrap at $590/mt on an FOB basis compared with U.S. Midwest rebar prices around $700/mt, at a 25% tariff the arbitrage to the U.S. would be closed, especially when considering freight costs.

Growing U.S. mill capacity is also bearish for the import market, with capacity currently at 78% and expected to be bolstered to between 80% and 90%, which would see steel production increase between 7 million and 19.5 million mt. This would drastically reduce the U.S.'s reliance on foreign imports, which totaled 34 million mt in total in 2017.

Exports from the UK-Continent are expected to continue in spite of this increased U.S. capacity, as the U.S. relies on the EU for a number of key steel grades including tinplate and wire from the Netherlands and Germany, with specialist grades accounting for around two-thirds of the 3 million mt of exports in 2017.

The repercussions are likely to have a drastic impact in the short-term for the European market, however, as Brazilian and Turkish exporters looking for a new home for their steel will aim to push material towards the UK and Southern Europe.

As much as 13 million mt of steel could be redirected to the European Union if the U.S. applies its section 232 tariff plan on the trading bloc, according to Geert Van Poelvoorde, president of the European Steel Association (Eurofer). This move is likely to result in the immediate establishment of pricing quotas to protect the domestic industry, according to market sources.

The reduction in exports to the U.S., as well as an influx of steels from Brazil and Turkey, will of course be bearish for Supramax freight in the UK-Continent -- a market which is traditionally tightly balanced and very responsive to a slight increase or decrease in cargoes -- as well as the West Mediterranean, and will also hinder the rebalancing of the Atlantic basin by depriving owners of trans-Atlantic fixing opportunities to return to the U.S. Gulf Coast.

The implications for the Atlantic U.S. freight market are more nuanced, however. Tonnage availability in the U.S. Gulf and East Coasts is expected to be reduced as Turkey, Brazil and the EU export less steel to the U.S., leaving fewer vessels discharging in these regions, and therefore fewer options for charterers with spot requirements. 

However, this shift in trade flows is likely to be a positive factor for charterers with flexibility on their dates, as reduced employment opportunities in the UK-Continent should allow charterers in the U.S. Gulf and East Coasts to secure vessels for their requirements on a cheaper DOP basis from the UK-Continent and West Mediterranean, rather than from their immediate surroundings. 

Ultimately these developments remain conditional on the implementation of the steel tariffs, and with the EU actively pushing to secure exemptions the freight picture remains muddied, as an exemption from this tariff would leave exports from the region largely unchanged. 

But Brazil, Turkey, India and Taiwan are unlikely to secure exemptions, which means that while European exports of high-grade steels may continue to flow to the U.S., the outlook for freight in the UK-Continent and West Mediterranean will remain bearish until an import quota is adopted by the EU. 

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