The number one risk to the US chemical sector from the US steel and aluminium tariffs is not the resulting actual higher construction costs, but retaliation from other countries escalating into a trade war.
The American Chemistry Council (ACC) estimates a typical 1.5m tonne/year cracker in the US uses about 18,500 short tons of steel and 1,150 short tons of aluminium.
The steel component represents just around 2% of total investment costs for a new cracker using traditional input-output analysis and cost engineering data, according to the ACC.
“Our 2% estimate reflects the purchased costs of the steel – not the finished cost of the equipment, foundation, etc, which includes fabrication labour. It’s just the steel mill product – pipe, rebar, hot-rolled coil, sheet, etc,” said Kevin Swift, chief economist of the ACC.
On this basis, a 25% increase in steel costs would equate to a total increase in US chemical project construction costs of 0.5% – hardly a deal-breaker but still an incremental negative factor.
US President Trump announced on a 25% tariff on steel imports, and a 10% tariff on aluminium on 8 March but there are exemptions for Canada and Mexico, as well as certain types of steel the US needs. Thus an overall steel cost increase resulting from the tariff is likely to be well below 25%.
Before the details of the US tariff announcement were made, DowDuPont president and chief operating officer Jim Fitterling noted that very roughly 20% of the cost of the company’s $6bn in latest US Gulf Coast investments was related to steel.
However, this could include the cost of finished components or equipment made from steel. The figure was meant to be “all inclusive” regarding steel, according to a DowDuPont spokesperson.
US TARIFF COVERAGE
Trump’s presidential proclamation on steel tariffs on 8 March includes certain iron and steel ingots; semi-finished products; flat rolled products; bars and rods; wire; angles, shapes and sections; sheet piling; rails; fish plates and sole plates; and tubes, pipes and hollow profiles.
“The tariff is apparently on the steel mill products… For a fabricator of a pressure vessel, for example, if they haven’t bought the steel yet, the costs of the tariffs would be included in future purchases of steel… and the fabricator would likely pass these costs on to the purchaser of the pressure vessel – in this case the chemical company making the investment,” said the ACC’s Swift. Since the tariffs are not on chemical project equipment itself, one could expect more imports of such equipment.
“My impression is that the protectionist coverage along the steel and aluminium value chains will be spotty. Where there are openings – or at the point down the chain where the tariff coverage cuts off – I would expect to see a rise in imports of those products that use steel and aluminium as inputs, such as a piece of cracker equipment,” said Emily Sanchez, director of economics and data analytics at the ACC.
“Offshoring will be incentivised in those industries. For the same underlying reasons, the 2002 US steel tariffs incentivised the offshoring of downstream consuming industries. I don’t see why that wouldn’t be a consequence this time around,” she added.
President Trump’s US steel and aluminium tariffs are the first big shot in the global trade battle
The bigger risk is the backlash from other trading partners, and whether this escalates into a wider trade war with the US.
Thus far, the response has been muted. China has talked about not wanting a trade war, and the EU has warned about tariffs on US jeans, motorcycles and bourbon whiskey in retaliation.
It’s hard to believe the latest moves would escalate into a global trade war, but the US is likely not done with protectionist measures. The first major shot in the global trade battle has been fired. Now wait for the blowback.