May 2018, Vo. 245, No. 5
Features
Metal Import Tariffs: Unwanted ‘Help’ for Pipelines
By Richard Nemec, Contributing Editor
In a new version of “March Madness,” a confederation of nearly four dozen trade associations wrote to President Trump urging him to halt plans to levy hefty tariffs on China. This concerted, and nevertheless unsuccessful, move by the business community representing a wide swath of U.S. commercial interests came a week after the energy industry had widely and loudly lectured the president on his decision to inflict tariffs on steel and aluminum imports, a decision widely regarded as counterproductive to the North American pipeline sector.
Outside of the energy sector, General Motors CEO Mary Barra was telling the annual CERAWeek by IHS Markit conference in Houston that GM gets most of its steel and aluminum from within the United States, so she thought her giant automaker could “more than offset” any negatives from the Trump tariffs. But she was concerned about the macro economic implications as were most of the business leaders, including energy industry senior executives.
“I think you do have to look at if changes occur that drive the costs up, it will have a direct impact on demand because there is an affordability issue with cars that we have to stay cognizant of; if there is an increase to the point people stop buying [new] cars and buy used [ones] that will affect jobs,” said Barra.
Last year, the United States imported 35.6 million tons of steel, equating to about 36% of the nation’s consumption and about $33.6 billion, according to Wood Mackenzie, the Scottish-based global research/consulting firm. China accounted for 2.9% of the U.S. steel imports in 2017, and the volume accounted for only 1.4% of China’s total 74.8 tons of steel exports.
See also: Historic Perspective on U.S. Protective Tariffs
“Thus, the steel tariffs will not have much impact on Chinese steel exports and China does not have as much to lose as the traditional U.S. trading partners,” said He Ming, senior manager for Wood Mackenzie’s Asia operations. “We think the steel tariffs will not solve the underlying problem of the high cost of steelmaking in the United States that has forced steel end-users to search for cheaper imports.”
Marc Spitzer, the former FERC commissioner now a Washington, D.C.-based energy attorney and partner in Steptoe and Johnson with both pipeline and LNG export facility operators among his clients, said the U.S. steel manufacturing is more for the gathering systems, and with large-diameter pipelines or liquefaction facilities, most of their steel is not made in the United States.
“My LNG export clients indicated – before the exemptions were made public – that they were looking at about a 10%-12% hit, and that’s material, given the capital requirements for LNG exports is a lot higher percentage than a gathering pipeline in the Permian Basin.”
Before Trump actually established the controversial tariffs, the two major pipeline associations based in Washington, D.C., fired off a letter to the White House, hoping cooler heads would prevail. They didn’t, and as spring arrived, U.S. tariffs were rammed into place with some extra bitter pills for the Chinese to swallow. Failing to turn back the tariffs and threat of a global trade war, the pipeline representatives quickly shifted their efforts to seeking exemptions for pipeline builders.
True to his words earlier this year, Trump followed through with a levy everyone seems to dislike, including 25% on steel imports and 10% on aluminum, excluding Canada and Mexico, which collectively represent more than a quarter of the U.S. steel imports. The president wrapped the need for the tariffs in a national security blanket rationale that emerged from a study he requested from Commerce Secretary Wilbur Ross.
“[Ross] found the present quantities of steel [articles] imports and circumstances of global excess capacity for producing steel are ‘weakening our internal economy,’ resulting in the persistent threat of further closures of domestic steel production facilities and the ‘shrinking of our ability to meet national security production requirements in a national emergency,’ according to the proclamation signed by Trump March 8. Steel imports were threatening the U.S. national security, and therefore the tariffs were warranted immediately, the president said.
Citing the tariffs’ potential job-killing possibilities, along with the threat of setting off global trade wars, industry arguments were unable to change Trump’s mind, even when they pointed out that tariffs could hurt efforts to boost the U.S. standing as the world’s leading natural gas and oil producer along with its efforts to ramp up rebuilding the nation’s infrastructure on a national scale.
In Congressional testimony to the Senate Finance Committee on the morning the tariffs were effective, U.S. Trade Representative Robert Lighthizer listed notable exemptions besides Canada and Mexico, including the European Union (EU), along with Argentina, Australia, Brazil and South Korea. One Washington, D.C.-based research/consulting firm estimated that this could exempt 22.4 million metric tons (mt), or 65% of the 2017 gross U.S. steel imports from the 25% tariff, including 3.06 million mt of 2012 pipeline steel imports, or 60% of pipeline steel imported back in that calendar year.
The nations named for exemption represent more than half of the U.S. import supply of steel, said Tom Trendl, a colleague of Marc Spitzer’s and partner specializing in international trade at the Steptoe law firm’s Washington, DC, office.
“It is absolutely correct that when we first heard about this everyone was up in arms, and a number of countries were trying to get an exemption from this. What the president did was eventually exempt a number of major suppliers of steel to the United States. The exemptions made a major dent in what appeared to be a pretty catastrophic event for purchasers, suppliers and end-users of pipe product,” Trendl said.
Typical of the arguments by the industry that fell on deaf ears at the White House are those from Texas Alliance of Energy Producers Board Chairman Robert Osborne, voicing the concerns of 2,600 independent oil/gas producers.
After acknowledging the progress from the Trump administration rollback of regulations and its strong support for continuing the oil/gas industry’s past 15 years of growth, Osborne warned the nation’s steady march toward energy independence could be sidetracked by the steel/aluminum tariffs.
“It is with this recognition of your efforts to encourage America’s energy dominance that we respectfully request your further consideration of steel tariff [exemptions]. The exemptions for Canada and Mexico are very helpful, and if those were made permanent that would alleviate our concerns considerably,” Osborne wrote, adding in a pitch for the president keeping the North American Free Trade Agreement (NAFTA) essentially in place.
“The oil and gas business at all levels, and in our case, the ‘upstream’ (exploration/production) sector, is very much a ‘steel-consuming’ industry,” Osborne emphasized. “Steel inputs easily account for 10% or more of the upstream industry cost structure from drilling rigs to oil country tubular goods – drill pipe, downhole tubing, line pipe as well as other oilfield equipment.”
Metals tariffs are seen widely as “inconsistent” with the Trump administration’s own goal of continuing the U.S. energy renaissance and building world class infrastructure that supports “global dominance” in the sector, according to American Petroleum Institute CEO Jack Gerard. “The U.S. oil and natural gas industry, in particular, relies on specialty steel for many of its projects that most U.S. steelmakers don’t supply,” He said in early March when the public debate began to focus on the reality of the Trump commitment to addressing global trade imbalances.
“Consideration must be given to continue the unprecedented and historic energy renaissance that our industry has driven through important investments that have resulted in job creation and economic growth.” Gerard and many others warned that the president’s significant shift on trade policy “could create confusion in supply chains, unnecessary costs and impacts to U.S. capital intensive projects, and threaten high-paying industry jobs,”
Although largely ignored, the facts are such that the U.S. energy industry relies on global steel imports for the majority of its operations, including steel for drilling, onshore/offshore production facilities, pipelines, liquefied natural gas (LNG) terminals, refineries and petrochemical plants.
Many of the trade association leaders, such as Andy Black, CEO at the Association of Oil Pipe Lines (AOPL), see Trump as undermining what they consider his own good work during his first year in office to “reinvigorate” the U.S. economy and dial back what he saw as excessive regulations. “After [he] has done so much for the economy and providing Americans tax relief, we would hate to see American workers lose jobs from steel trade actions that delay or cancel pipeline construction projects,” Black warned in February, only to express disappointment a few weeks later.
“It is now critical the exemption process work to avoid U.S. pipeline workers losing their jobs,” he stressed after Trump announced his tariff action. In joining the coalition that tried to head off the president’s tariffs, AOPL cited a pipeline industry study from mid-2017 that found domestic steel and pipe production capacity was “insufficient” to meet pipeline demand, especially for larger-diameter or thicker-walled pipelines.”
At 3% of the total U.S. steel market, pipeline-grade steel is a specialty product forming a niche market that U.S. domestic steel producers largely exited,” the study underscored.
The picture becomes more muddled with a deeper data dive showing that U.S. pipe-making mills – a half-dozen located in the South – can only handle one order at a time, meaning that wait times of one to two years or longer would be in play for new orders. The likely result is what Black points out are delayed or canceled projects. In March, AOPL was cautioning that it was still too early to know how effective the exemption process would be.
Not all the industry players are viewing the metals tariffs with alarm as evidenced by Charif Souki, co-founder and board chairman of Houston-based Tellurian Inc., a would-be LNG exporter/trader with a proposed new pipeline, Permian Global Access, to its Louisiana Gulf Coast proposed export site. Souki articulates two views on tariffs – a personal one that doesn’t like them and a professional, industry viewpoint that sees the U.S. sector as strong enough to shrug off any negative effects.
“From a business standpoint, it really doesn’t matter much,” Souki told a Fox television business news reporter last March during the CERAWeek conference. “We’re in a very fortunate position to have access to cheap gas in the United States, and we now are building the liquefaction facilities [for export] in a very competitive manner, so it will not have much of an impact on us.”
In late March, officials with Sempra Energy’s LNG and midstream business unit told P&GJ that they did not expect their Cameron, La., LNG export facilities now under construction to be impacted by the tariffs. Their procurement of steel and aluminum falls under an EPC contract with CCJV, jointly owned by Chicago Bridge & Iron Co. NV (CB&I) and Chiyoda International Corp. The EPC orders had been almost fully completed at the time Trump’s tariffs took effect.
Souki’s estimate is for the tariffs to perhaps add 5% to his company’s project costs, which he indicated is absorbable. But when pressed on the more macro-economic effect of the tariffs, Souki is a bit more circumspect.
“It is hard to know the exact details, so we’ll have to wait and see what the real impact is. But at first cut, we know it will increase our costs in the neighborhood of 5% for most liquefaction facilities, pipelines and for the drilling of new wells in the next two to five years. It will definitely have an impact, but in the overall scheme of things we have such a competitive position compared to the rest of the world, it really won’t matter very much.”
In his national cable TV network appearance, Souki was asked about the prospects for a multi-billion-dollar national infrastructure building push in the wake of the metals tariffs, and he remains sanguine about those prospects, noting there is need for up to $150 billion in new energy pipelines alone.
“The $150 billion the industry can fund itself, so I don’t think the industry will need any [governmental] help,” Souki said. “What we need is regulatory certainty, which the administration is working on improving, and a mutual understanding that when we make an investment it will not be [jeopardized] by regulatory delays.”
When the debate is expanded to a broader level of trade wars among nations as opposed to the machinations of one industry, Souki said he is solidly in the camp of analysts, economists and CEOs that say trade wars are no good. “The part of the population that will suffer the most is the American consumer because the cost of everything will go up for them,” he said.
A spokesperson for Wood Mackenzie’s Singapore office with a global view, Ann Lee noted the tariffs apply to all steel products, pipelines being only one of many. Therefore, they will impact the energy sector, Lee said, but it is hard to estimate how much the impact will be at this point.
“The impact will depend on how much pipe prices will be increased to reflect the shortage due to reduced imports. This also depends on how much supply the U.S. producers can increase against the backdrop of less imports,” Lee said.
“I would be concerned if I were an importer of pipe, and if you import it from a country not on the exempt list, as of midnight last March 23 you will be paying 25% duty, even if it was contracted for earlier; if it enters the commerce of the U.S. today, you’re going to be hit by a 25% tax. That in and of itself should be disruptive as hell,” said Steptoe’s international trade attorney, Tom Trendl.
An “importer of record” who files a U.S. import Form 7501 is responsible for the duties, and as Trendl said, it is “not a bond, it’s cash, and that is a helluva lot of money for most companies.”
It has also prompted free-trade-minded Republicans in Congress to propose repealing Section 232 of the Trade Expansion Act of 1962, which delegates to the president the power to adjust trade restrictions and impose tariffs. P&GJ
Comments