U.S. Steel (NYSE:X) has urged the U.S. Commerce Department to reconsider its decision of not imposing duties on steel tube imports from South Korea. The company says that South Korean steel producers are manipulating facts and setting up a maze of companies to disguise the real cost of producing and importing steel to the U.S. This, according to U.S. Steel, is distorting the market unfairly to its detriment and violates international trade rules.
The Commerce Department had issued a preliminary ruling to this effect last month. It is scheduled to make a final determination on July 8 after which the U.S. International Trade Commission will take a final decision on August 21. 
Oil and country tubular goods (OCTG) steel generates high margins for steel producers and is critical to their net profits. Rising imports in the last few years have been depressing prices in this category despite rising demand. This explains the anxiousness of U.S. Steel to get sanctions imposed on South Korea, a major producer of OCTG goods. See Full Analysis of U.S. Steel Here
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Foreign competitors may have lower labor costs and some are owned, controlled or subsidized by their governments, which allow their production and pricing decisions to be influenced by political and economic policy considerations as well as prevailing market conditions. In countries like China, state owned steel producers are heavily subsidized, which enables them to export to the U.S. at competitive prices and undercut the local producers.
U.S. Steel contends that many of the steel imports violate U.S. trade laws. Under these laws, duties can be imposed against dumped products, which are products sold at prices below that of producer’s sales price in its home market or at prices lower than its cost of production. Countervailing duties (CVD) can be imposed against products that have benefited from financial assistance by a foreign government in production or export of the product.
The rising tide of imports into the U.S. led U.S. Steel and other major producers to ask for duties on imported oil country tubular goods (OCTG) which are supposedly being sold at unfairly low prices. This prompted the U.S. Commerce Department to launch an investigation into alleged unfair trade practices being followed by exporting countries. On August 16, the U.S. International Trade Commission voted that there was a reasonable indication that U.S. manufacturers are injured by imports of OCTG goods from the countries mentioned in the complaint. This allowed the Commerce Department to continue with its investigations. It took a decision to impose anti-dumping duties on imports from eight countries but excluded South Korea. The countries on which duties were imposed are India, the Philippines, Saudi Arabia, Taiwan, Thailand, Turkey, Ukraine, and Vietnam. 
Imports of OCTG steel from the nine countries under investigation totaled $1.8 billion in 2012. The quantity more than doubled since 2010, owing to rising U.S. oil and natural gas production which is increasing demand for OCTG steel. Given the high price realizations from OCTG grades of steel and the fact that they account for 15% of its revenues, U.S. Steel has a significant stake in ensuring a favorable outcome from the investigation. 
Until the time the investigation finally concludes, U.S. Steel’s OCTG business is likely to continue facing challenging business conditions from imported products.
Impact Of Imports On U.S. Steel’s Business
The imports of tubular steel, used mainly in the oil and gas industry, accounted for an estimated 52% of the U.S. domestic steel market in 2012, up from 47% in 2011 and 46% in 2010. We think that this is the reason why despite a tremendous shale gas boom, U.S. Steel’s shipments of tubular steel actually declined by 6-7% year-over-year in 2013. The prices have also risen at an annual rate of just 4% in 2012 and 2013 after registering 8% growth in 2011. The imports of tubular steel hurt U.S. Steel more because it sells at twice the price of flat rolled steel and generates much higher margins, and this takes away from potential U.S. Steel tubular sales. In 2013, this segment accounted for 48% of the company’s operating income. 
Going beyond the present case, U.S. Steel can’t rest easy even if it succeeds. Such duties are generally subject to review every five years and U.S. Steel actively participates in such review proceedings. In the past, the company has been successful in getting duties imposed on exporters from Germany, China and Vietnam.
However, U.S. Steel doesn’t succeed every time and there could also be political factors that lower the level of protection against international trade law violations. There is also a risk that international bodies such as the World Trade Organization or judicial bodies in the United States may change their interpretations of trade laws in ways unfavorable to U. S. Steel.Notes:
- U.S. steel executives urge duties on some imports from South Korea, Reuters [↩]
- U.S. Steel Says South Korean Companies Are Dumping Pipes in U.S., Bloomberg Businessweek [↩]
- US to probe steel pipes from Turkey, 8 others, Daily News [↩]
- U.S. Steel 2013 10-K, SEC [↩]