The U.S. Steel Industry Faces an Uncertain Future

The WTO had ruled against U.S. import tariffs of cheap imported steel. This is bad news for U.S. Steel and its peers.

Jul 21, 2014 at 12:35PM

The last week has been a turbulent one for U.S. Steel (NYSE:X), AK Steel (NYSE:AKS), and Steel Dynamics (NASDAQ:STLD). These three companies, and indeed the wider U.S. steel industry in general, have been buffeted by a barrage of news regarding import tariffs.

The good news came in the form of the Commerce Department's decision to place hefty import tariffs on some steel companies importing steel from Korea. This move followed claims that some Korean companies had been dumping cheap steel tubes into U.S. steel markets, denting sales of domestic producers.

Dumping steel
Over the past decade, steel producers across Asia, especially in China, have been looking to boost profits by selling their products in U.S. markets. This influx of low-cost steel hit the industry hard, and companies started to lobby hard for policymakers to step in.

Finally, during 2010, policy makers levied import duties on Chinese steel; this was a victory for the American steel industry. However, the imports did not stop as other Asian producers stepped into the void.

According to Commerce Department filings, South Korea "dumped" 894,300 metric tons of steel tubes into the U.S. market during 2013 at a value of around $800 million. Seven other exporters dumped an additional $630 million of steel tubing into the market during the same period. "Dumping" is a term used for goods sold into the market at less than fair value.

Taking action
To combat steel dumping, the Commerce Department announced on July 11 that it was placing import tariffs of 9.89% to 15.75% on eight steel producers found to be dumping their steel on the market. All that remains is for the U.S. International Trade Commission to make the levies permanent.

These tariffs were great news for the U.S. steel industry. It was mainly steel tubing being dumped on the market, a play on the shale oil boom. U.S. Steel has already been forced to shut down some of its tubular goods manufacturing capacity due to a weak pricing environment. The ruling should have a significant effect for all U.S. Steel producers going forward.

Wall Street analysts estimate that the price gap between imported and domestically manufactured steel tubing is around $200 per ton. After the import tariffs are applied, this gap should drop to $65 to $120 per ton. It is estimated that a differential of less than $100 per ton will stave off imports.

One door opens, another closes
While the introduction of tariffs on South Korean steel was good for the industry, investors were hit with the bad news a few days later. The World Trade Organization reprimanded the U.S. for placing import tariffs on Chinese and Indian steel.

Specifically, the WTO has ruled that the U.S. had illegally acted to protect its own domestic producers of steel by placing hefty tariffs on Indian and Chinese steel mills.

The case lodged with the WTO is complicated and has many moving parts, some of which were approved and others were rejected. In the end, the U.S. was found to have broken WTO rules and has been urged to "correct its wrongdoings." The U.S. has said that it is weighing its options.

Foolish summary
The last week has been an eventful one for the steel industry. On one hand, South Korean dumping has been slowed. On the other, it's not clear if the U.S.'s protectionist policies regarding steel tariffs are legal; they could end up being lifted.

As of yet, it's not clear what the outcome of these cases will be. The next few months will be eventful for the steel industry.

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Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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