Tariff turmoil in the Capital Region steel industry

BALANCING ACT: Stupp’s Robert Turner acknowledges steel tariffs have put “a bit of a squeeze” on the company, but believes the Trump administration actions will help level the playing field for U.S. suppliers. (Photo by Don Kadair)

There’s no question that tariff-induced spikes in steel prices of more than 25% have industrial owners worried. While many recognize that a tariff could bring domestic suppliers into economic equilibrium, the resulting cost uncertainty has them wringing their hands. That’s because an estimated one-third of their capital project spending comes from steel, whether in vessels, piping or structural support.

The 25% tariff on steel and aluminum was levied in March under Section 232 of the Trade Expansion Act of 1962, which authorizes the president to adjust specific imports that pose a threat to national security. Then, on June 1, exclusions from the tariff expired for Mexico, Canada and the European Union.

To date, no known local projects have been postponed as a consequence. Toshiaki Ansai, vice president-planning and marketing at Shintech Inc. in Houston, says his company’s mega-expansion in Plaquemine is moving forward—for now. In July, Shintech Louisiana LLC announced it would invest $1.49 billion at the plant to develop a new chlor alkali and vinyl chloride monomer production facility and expand an existing polyvinyl chloride manufacturing facility.

“While we are concerned about the tariff situation, it has not impacted our construction plans or schedule at present,” Ansai says in a written statement.

Greg Bowser, president of the Louisiana Chemical Association in Baton Rouge, doesn’t know of any project delays either, but says his members are undeniably concerned. LCA members have put pressure on Louisiana’s congressional delegation to have the tariffs rescinded, saying it amounts to little more than a tax on materials.

“Just think about all the steel that goes into the new Sasol facility over in Lake Charles,” Bowser adds. “You add 25% to the cost of that steel and you don’t build that project here. It goes somewhere else. We hope that they will find another way to address this issue because it’s going to create some economic problems for our industry and state.”

The threat is very real, says economist Loren Scott of Loren C. Scott & Associates. The larger the petrochemical or manufacturing project, the more significant the impact to cost. He estimates that about $90 million could be added to the planned $1.85 billion Yuhuang Chemical methanol plant in St. James Parish. “It’s a non-trivial number,” he says. “The decision to go forward is a matter of math. Someone at the company is figuring the rate of return on equity, and the rate of return just went down.”

Scott hopes the tariffs are merely a bargaining tactic on President Donald Trump’s part, with the end goal of getting China, the EU, Mexico and Canada to the negotiating table. However, if the move is strictly protectionist in nature, “this is going to be bad on a number of levels,” he says, adding it will cause some owners to tap the brake instead of the accelerator and possibly lead to a worldwide recession.

Stevie Toups, executive vice president of Turner Industries in Baton Rouge, expects the topic of tariffs is a favorite in the boardrooms of many large industrial owners. He fears that pipe and vessel fabricators could leave en masse to be closer to steel suppliers and avoid the tariff, offsetting any gains in domestic jobs. “If the president wants tariffs, that’s fine,” Toups says. “If he doesn’t want tariffs, take them off. But sitting in purgatory is what kills us.”

The pricing instability has led to shorter project estimation cycles for some contractors. Toups says a construction estimate might be good for only a week rather than 30 days “because they just don’t know what’s going to happen,” adding that some owners are assuming the risk of rising steel costs so that contractors don’t have to account for it in their bid.

Somewhat counterintuitively, pipe supplier Stupp Corp. in Baton Rouge expects oil and gas owners to hit the gas instead of the brakes as they try to head off future cost increases.

Chip McAlpin, Stupp vice president of corporate strategy and development, says the market dynamics of the past actually delayed investment because owners thought steel prices would continue to decline. That’s changed since the tariff. “It has been a catalyst,” McAlpin says. “There’s a lot of market opportunity right now. The midstream pipe market has picked up fairly substantially so we’re optimistic that with all the production that’s coming out of the Permian Basin and west Texas, we’re going to see a flurry of pipeline construction activity.”

As proof, Stupp’s revenue is on the rise, a decidedly different scenario than in 2016 when layoffs were imminent. McAlpin acknowledges there are other market forces at work, as oil price increases and new shale plays open up new opportunities for the oil and gas industry, his primary customer.

No problems for some, others see trouble

Perhaps no material supplier has felt the burn more than steel pipe manufacturers, but Stupp managers say they welcome a rise in prices if it will sustain the domestic steel market. The 500-employee Stupp plant in Baton Rouge gets some 90% of its steel from domestic sources.

Robert Turner, Stupp senior vice president of strategic sourcing and quality, says domestic steel prices have risen in direct correlation with the 25% tariff. Even though it has put “a bit of a squeeze on us,” he sees it as a positive step since it brings U.S. suppliers back to a more sustainable range. “We don’t see it as a positive thing if five or 10 years down the road we’re required to import steel because we don’t have a domestic steel industry. We think keeping the domestic steel industry stable is a good thing for the overall economy.”

John Clark, Stupp chief commercial officer, says steel costs are somewhat diluted once they’re factored into the overall cost of a pipeline project. “To build a pipeline, you’ve also got to buy fittings, valves and compressors, so when you look at what the actual raw steel comprises as a percentage of the total spend, it’s not as substantial.”

Despite a slew of new, multibillion-dollar oil and gas pipelines under construction in the booming Permian Basin in Texas, the pipeline supplier hasn’t experienced any supply shortages. Turner has found steel to be readily available. “There has been a little bit of misinformation out there that steel is not available domestically. We’ve been able to procure the material we need to operate our business.”

Others, however, say shortages are widespread. Paul Nathanson, spokesman for the recently formed advocacy group Coalition of American Metal Manufacturers and Users in Washington D.C., says steel shortages are very much a reality because domestic suppliers can’t handle the load. “A lot of our manufacturers can’t get the steel when they need it, and lead times (for steel orders) have gone from a couple weeks to six months.”

Nathanson acknowledges that there have been no significant layoffs, but says that’s because many companies have, until now, benefitted from tax cuts. “Many of these companies are absorbing the costs right now,” he says. “They entered the year very excited because the tax cuts gave them more money to invest in their businesses, and they were going to hire and expand production lines. The tariffs have completely wiped that out.”

He hopes that once domestic market utilization rates hit 80% the tariffs will be adjusted or eliminated. “But nobody is talking about that, so we’re trying to raise awareness. For our guys, steel and aluminum is the most important input they have. We need to keep the focus on these tariffs and get them rescinded as quickly as possible.”

Nathanson agrees that there was an over capacity problem before, but feels negotiating is the best option for resolving the crisis. “And we were actually making progress when these tariffs were put in place.”

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