Tariffs: A Black Cloud Marring the 2019 Commodity Outlook

There was one word that loomed over the proceedings at The Right Place/Supply Chain Management Council's Commodity Trends 2019 Outlook event Wednesday in Grand Rapids, Michigan.

Tariffs.

From the multiple expert presentations to numerous audience questions and comments on the topic, it didn’t take much to pinpoint the effects of tariffs as a recurring theme of the half-day conference, at which MetalMiner Executive Editor Lisa Reisman presented our 2019 metals outlook. Indeed, the current onslaught of tariffs — including those implemented under Sections 201, 232 and 301 of U.S. trade law — seemed to be one of the primary concerns on everyone’s minds.

The hosting group’s primary goal is to equip West Michigan businesses, mainly small and medium-sized manufacturers, with the knowledge they need to manage their commodity strategies. Given the current trade environment, it’s no surprise that many of the event’s key takeaways centered around what types of actions these manufacturers can — or should — take to avoid risks created current and potential tariffs.

First Steps for Tariff Mitigation

Reisman kicked off the event by pinpointing several tangible actions companies are taking to mitigate tariff risks:

  • Tariff code analysis. Companies are hiring consulting firms to reclassify imported products into different customs codes and classes — which is legal and largely legit, according to Reisman
  • Performing Pareto analysis on part spend. “We work with a lot of middle-market manufacturers who have up to 2,000 parts affected by tariffs, and a lot are doing the old 80/20 with regard to what affects the bottom line,” Reisman said
  • Should-cost analysis and modeling, which involves breaking out constituent components. For example, splitting out aluminum ingot cost from Midwest premium from all other constituent costs, and then ideally locking in a contract in which you’re only at risk for the floating metal piece. By creating these should-cost analyses, organizations can better negotiate with suppliers to mitigate price increase risk. (While hardly anyone in the event audience raised their hand when asked whether they were familiar with this practice, it became clear why they should by the end)
  • Alternate country sourcing and alternate domestic sourcing. With the latter, manufacturers in the auto industry, for example, are striving for a balanced 60/20/20 arrangement with their suppliers

Despite the threats of higher costs and uncertainty stemming from tariffs on foreign goods, Reisman said some buyers won’t plan to change their behavior. In response to a poll during a recent Steel Market Update conference, 54% of respondents said they are going to buy at same volume levels (or more) from foreign sources in 2019 as they did this year.

“I found that interesting,” she added.

Ultimately, everyone wanted to know how long these tariffs will last. When asked, Reisman responded, “My opinion? It’s here to stay for the mid-term.”

She went on to say that the president is the only person who can make them go away. If President Trump were impeached and Vice President Mike Pence — who was also in Grand Rapids the same day, as it happens — were to take over, suffice to say, businesses could be facing an entirely new trade environment.

Pursuing Tariff Exemptions

Instead of mitigating tariff risks, some organizations have considered asking for exemptions, bypassing the issue entirely. But few businesses have found that route effective.

Sonja Johnson, executive director of Grand Valley State University’s Van Andel Global Trade Center, gave a comprehensive overview of the three trade law provisions under which tariffs have been implemented. And in her view, anything more than battening down the hatches may just be a fool’s errand.

Section 201 (washing machines and solar panels), Section 232 (steel and aluminum) and Section 301 (China IP theft and the huge tit-for-tat battle focused on thousands of line-item goods between the U.S. and China) have all conspired to cause major headaches for many manufacturers in that room.

All of the national flags on the bottom half of the below slide from Johnson’s presentation illustrated just how hard it is to navigate the tariff landscape, in terms of the number of countries (including the E.U. trading bloc) that have retaliated with tariffs in kind:

One example of a short-term action for manufacturing SMEs is requesting exclusions from the above tariffs domestically. That has not gone well. Johnson cited a statistic showing that of all exclusion requests domestically, only 266 had been accepted out of the 27,000 submitted during first three months after the Section 232 tariffs took effect.

That being said, there is no time limit to submit exemption requests for Section 232 goods. Organizations can file online through the Federal Rulemaking Portal (regulations.gov), where other submissions that have been denied can also be viewed.

Price Forecasts

Section 301 has the broadest reach of goods that the U.S. and China have each gone tit-for-tat on: more than 6,000 line items representing not only B2B-facing goods but also consumer-facing products. It’s “a lot to drill down on,” Johnson said.

One such group is the resin markets, as Mark Kallman, vice president of engineering resins at technical consulting firm RTi, outlined in his presentation.

As tariffs apply to resin, China did retaliate on polyethylene, polypropylene, EDC, PBT and PET, for which the year-to-date tariffs were raised, according to Kallman. In total, this accounted for $2 billion in chemicals and plastics.

The next round of tariffs could be raised on PC Nylon and acrylonitrile butadiene styrene (ABS), a common thermoplastic polymer with numerous manufacturing applications, Kallman said.

In total, the tariffs are expected to affect some $16 billion in overall chemicals and plastics imports and exports.

So what does this mean for prices?

Tariffs will continue to affect purchasing strategies for the foreseeable future, according to Kallman and Reisman. Kallman points to higher prices in certain resin markets, such as polycarbonate grades that have to be imported into the U.S. Meanwhile, MetalMiner expects metals such as aluminum and cold-rolled steel coil (CRC) to see higher average prices in 2019 compared with current levels.

The Long-Term View

What is the net effect of these tariffs in relation to the broader economic impact on this bloc of West Michigan manufacturers as a whole, this correspondent — and current resident of West Michigan — wondered?

Johnson said we should begin to see the real effects within the next three months. By then we’ll see if manufacturers have to move production elsewhere as a result, she told me. After all, applying for exclusions or exemptions is only a tiny piece of the overall strategy pie.

Yet moving production presents another big issue: when it comes to foreign direct investment (FDI), many nations have ways to lock businesses in. For example, investment rules could require a company’s operations have to remain within the country for a certain number of years, or that a certain percentage of labor must consist of local workers.

Johnson’s advice to SMEs? Speak to your legal counsel to get as much actionable information on these options as possible before making long-term business decisions. Ultimately, uncertainty about how long these tariffs will be in place could harm SMEs that are too proactive just as much as those that are doing hardly anything at all.

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