When President Donald Trump announced a 25 percent tariff on foreign-made steel, he painted a picture of an industry in crisis.
But American-made steel has been in high demand as U.S. vehicle production set records. The question now is whether tariffs will give U.S. mills new investment motivation to expand production of specialty grades such as stainless steel, electrical steel and ultra-high-strength steel.
Auto makers will need more of these specialized steels as they reduce vehicle weight and build electrified vehicles.
According to a new report from research company Morningstar, as much as 90 percent of the steel used in the average U.S.-built vehicle already is supplied by U.S. mills. That translates to about 2,100 pounds of steel per vehicle.
The immediate fear is that major suppliers such as U.S. Steel, AK Steel and ArcelorMittal will use the tariff as an opportunity to raise prices. But even if that happens, the impact could be modest.
The price of an average U.S.-made vehicle might rise about 0.8 percent, Morningstar predicts.
As long as the tariff doesn't trigger a trade war, an uptick in the price of steel is unlikely to throw the auto industry into chaos, said Morningstar analyst David Whiston, who co-authored the report. "A $300 increase is not likely to cause sales to collapse or [cause] a recession," Whiston noted.
Demand for imports
The bigger issue for supply chains is the small amount of steel now being imported.
On an American-made vehicle, sheet steel for body panels and structural steel for the body-in-white typically come from U.S. mills. But some components require foreign specialty steels.
Catalytic converters and exterior trim often are made of imported stainless steel, while the motors used in electric vehicles typically employ electrical steel from foreign mills.
AK Steel, in Cincinnati, is the only U.S. producer of electrical steel, according to the U.S. Commerce Department.
In a bid to keep such specialty steel products affordable, the Motor & Equipment Manufacturers Association has opposed the tariffs, arguing that "suppliers utilize many specialty materials and products that are not available domestically."
But U.S. steel makers—both large and small—now sense an opportunity.
U.S. mills owned by AK Steel, U.S. Steel and ArcelorMittal are vying to meet growing demand for ultra-high-strength steel used for seat frames, bumpers, rocker panels, pillars and other structural components.
On March 7, U.S. Steel announced it was restarting one of the blast furnaces in its mill in Granite City, Ill.
Ferragon Corp., of Cleveland, has spent $100 million to buy, renovate and equip a mill once owned by McLouth Steel in Gibraltar, Mich., just south of Detroit.
Other steel makers ship their steel coils to the Gibraltar mill, where an annealing line—more than three football fields long—heats the steel to temperatures as high as 1,800 degrees Fahrenheit. The end products are various grades of high-strength martensitic steel and dual-phase steel that are shipped to Tier 1 suppliers to make auto parts.
"The auto makers want to make their cars stronger and safer and lighter," said Ferragon CEO Eduardo Gonzalez. "So you've got to produce high-strength steel, or you'll be a dead man walking."
Ferragon, which operates five U.S. mills, competes against foreign steel makers such as Sweden's SSAB.
Last year, SSAB exported about 276,000 tons of high-strength steel from Sweden and Finland to the U.S.—more than twice the tonnage that the Gibraltar plant is capable of producing, Gonzalez says.
"The tariffs are great for this country," Gonzalez said. "I think we need them to protect against steel from Russia and the European Union. I think they subsidize the heck out of it."
Auto makers may not agree, but no one is publicly panicking.
General Motors gets 90 percent of the steel for its American-made vehicles from U.S. mills, while the steel in Ford's American-made vehicles is 95 percent U.S.-made, according to Morningstar.
On March 1, GM product chief Mark Reuss said the auto maker would not necessarily raise vehicle prices, opting instead to cut costs.
Meanwhile, the Japan Automobile Manufacturers Association warned that it expects vehicle prices to rise. But that group acknowledged that it does not yet know what the impact will be.
According to Bloomberg, Toyota buys 90 percent of the steel for its U.S.-made models from American mills—part of the auto maker's effort to source more materials from North American suppliers.
While auto makers monitor events in Washington, steel prices have been rising even before the tariffs take effect Friday, March 23.
At the end of February, hot-rolled steel cost $838 per metric ton, up from $736 in January, according to AlixPartners, the New York consulting firm. The tariffs are not the only factor in the steel market. A strong U.S. housing industry and a growing world economy have helped drive up demand.
In the past, GM and Ford cushioned themselves from volatile steel prices by making bulk purchases on behalf of their suppliers. They may have to dust off that policy again, if Trump sticks to his guns.
You can reach David Sedgwick at [email protected].