Cleveland Cliffs Inc (CLF)

[Democritus_of_Abdera]

Section 232…

As exemplified in the video posted by Saving Grace (see partial transcript below), Lourenco is excited by the possibility that the President will use Section 232 to impose tariffs or quotas on imported steel. The hope is that such tariffs/quotas will move US steel capacity utilization to the mid-80% range.

However, I suspect that if Section 232 is aggressively used, there will be some unintended consequences. These have been spelled out in several recent reports. See for example quotes from steelorbis.com below.

Notably, the major impact will be on what I consider to be friendly nations (Canada, Japan, Europe, etc).

If the tariffs/quotas are meaningful they will probably precipitate retaliation… probably against agricultural goods.

And, as steel prices go up, the cost of consumer goods using steel also go up.

Given these possible outcomes, I’m not so sure that Trump will implement Section 232 as aggressively as the steel industry hopes. And, if he does, I would avoid the US agricultural stocks until the threat of a trade war plays out.

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Quotes from the steelorbis blog of 6/27/2017

http://www.steelorbis.com/blog/2017/06/30/us-section-232-outcome-may-launch-trade-wars-eu-warns/

Canada, Mexico, Brazil, the European Union and Japan are among the top steel exporters to the United States. China, which Trump has criticized for hurting the US steel industry, ranked 11th last year, and trade experts say it is still a likely target due to the global overcapacity. A key concern is how exactly will tariffs be implemented. Additional countries which may be affected are South Korea and Vietnam.

Cecilia Malmström, EU trade commissioner, is urging the Trump administration not to proceed with a generalized tariff on steel imports, saying such a move would be “very bad” for Europe. She stated, “We would have to see if that measure follows the World Trade Organization (WTO) — and if it hits us hard, we will of course retaliate.” Of concern is retaliation with tariffs not only against US steel products but also against agricultural goods and other industries. The US agriculture industry exports approximately 25 percent of its production.

The anticipated US restrictions have already led to protests from Canada, Mexico, Germany and other individual countries. Steel from Europe, Canada and Japan could be hardest hit if Washington proceeds with national security penalties. Separately, Ms. Malmström said talks continued in Tokyo on an EU-Japan free trade deal. “We are in a very intense phase of our negotiation and hope to cl0se an agreement in principle very soon,” she said. The threats to NAFTA and other agreements by the present US administration has encouraged many including Mexico and the EU to seek other bilateral trade agreements.

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Quotes from the Bloomberg interview posted by Saving Grace (#msg-132579425):

https://www.bloomberg.com/news/videos/2017-06-28/cliffs-natural-ceo-on-steel-probe-iron-ore-prices-video

Joe Deaux (Bloomberg)
So everybody wants to know about 232…What do you think. What’s going to come out of this. Are there any specifics that you think we might actually get that would be one over the other.
Lourenco Goncalves (CLF CEO)
Well at this point it is very difficult to specify exactly what president will approve. I believe that the department of Commerce officials will put in front of the President a menu of 0ptions. All of them will be a very positive outcome for us and for our clients in the steel mills.

Joe Deaux (Bloomberg)
And what of the talk of tariffs or tariff rate quotas. Do you think it will be one or the other. Or, do you think we will see both implemented on some level.
Lourenco Goncalves (CLF CEO)
Its hard to really try to guess at this point. I believe that a tarriff quota combo would be more appropriate for the type of remedy that section 232 could do.

Joe Deaux (Bloomberg)
Whys that?
Lourenco Goncalves (CLF CEO)
Because section 232 is very powerful in terms of what the president can and cannot do. It basically covers all the bases. He can go as hard as he wishes to do. I appreciate very much, and the industry appreciates very much, what secretary Wilbur Ross and the US trade representative Robert Lighthizer have been doing in terms of paving the way to have something meaningful. And yesterday I had the opportunity to ask the director of the Department of Commerce that gave a speech at the conference about the enforcement. And, he reassured us that they are prepared to enforce. And that is also very important.

Joe Deaux (Bloomberg)
Now yesterday, again, we had interviewed John Ferriola, CEO at Nucor, and one of the things that he brought up and this is something that the AISI talks about is his hope that eventually the tariffs or tariff rate quotas or whatever is levied or decided will help boost utilization rates up to 85%. If that is the case are you guys prepared to be able to fill that gap?
Lourenco Goncalves (CLF CEO)
Absolutely. We believe that we are overdue to be running at that level at the steel mills in terms of capacity. And, Cliffs is prepared to support our clients, hands down.

Joe Deaux (Bloomberg)
And what would that mean for you. What would you have to change?
Lourenco Goncalves (CLF CEO)
We don’t have to change anything. We just need to deliver pellets faster. But that is exactly what we would love to do. That’s what we believe are going to be doing in the second half of this year.

Joe Deaux (Bloomberg)
Lets talk about iron ore prices …..

Joe Deaux (Bloomberg)
Lets turn to the hot iron briquet plant ….

Joe Deaux (Bloomberg)
So one more thing. We want to get a look out to the rest of 2017 in terms of demand. What do you see, a little bit of growth or we actually going to see some slowing in the second half?
Lourenco Goncalves (CLF CEO)
Section 232 will be an enormous positive for demand here in the United States. Steel mills will produce more, sell more be able to command probably better margins and that should have a positive repercussion on Cliffs. So, I’m extremely optimistic about the 2nd half.

Joe Deaux (Bloomberg)
So, I want to make sure that I’m getting it right. Are you relying on 232 to produce this demand or is demand fundamentally going to be all right.
Lourenco Goncalves (CLF CEO)
No, that’s a good point. I’m not relying on section 232. I expect that section 232 will come and in coming will be a positive. But even without 232. That’s the United States. That’s a very stable demand situation. As long as we don’t have unfairly traded steel, illegal imports, complicating the market unecessarily we should do fine.