Fallout from the recent imposition of tariffs on steel imports may raise domestic steel prices and further drive business out of the country.
Despite the fact that the nation is struggling through tough economic times and tariffs were recently imposed on virtually all steel imports, most tool steel suppliers are cautiously optimistic that business will begin to boom again as 2002 rolls along. However, there is some dissent among steel suppliers regarding the tariff issue - some don't see it as having much of an effect on the industry while others see it as a possible death sentence. Moldmakers, on the other hand, are mostly in agreement that they will remain virtually unaffected. It is an issue so controversial that a number of suppliers declined to be interviewed for this article and some spoke strictly "off-the-record."
On June 22, 2001, the U.S. International Trade Commission (ITC) began an investigation under Section 201 of the Trade Act of 1974. Section 201 mandates that domestic industries that are "seriously injured" or threatened with serious injury due to increased imports can petition the ITC for import relief. The ITC voted that injury had occurred, and remedy hearings were held last November. On December 7, 2001, the ITC voted on its recommendations for remedy, which basically included tariffs from eight to 40 percent, along with some quotas.
The ITC presented its recommendations for import relief to President George W. Bush. On March 5, 2002, he decided to impose tariffs ranging from eight to 30 percent on flat-rolled steel and other steel imports from countries like Australia, Brazil, China, France, Germany, Japan, the Netherlands, Russia, South Korea and Turkey. As of press time, most tool steels were excluded, but a number of grades were not - alloys like 4140 prehardened plates and stainless mold steel in bars. The tariffs, which vary by product line, are set to stay in place for three years. "This relief will help steelworkers, communities that depend upon steel, and the steel industry to adjust without harming our economy,'' President Bush said in a statement on the duties on 10 steel products. The tariffs took effect on March 20, 2002.
The President exempted imports from Canada and Mexico from the protection because of their partnership with the United States in the North American Free Trade Agreement (NAFTA). Bush also spared imports from developing countries that account for less than three percent of the total for individual steel product lines, according to World Trade Organization (WTO) regulations.
So what does this all mean to the industry? For one, the duties could cause foreign producers to sell their materials in other countries. Domestic steel producers may raise their prices to match the new higher prices - seeing it as a way to make more money and grow their businesses. Automobile manufacturers will most likely suffer as they will have to pay billions more to purchase steel to build cars, and it's a possibility that they may cut costs elsewhere and opt to have their molds built overseas or in Canada. Opponents and proponents weigh in on this hot topic and discuss how they have fared during troubled economic times.
Suppliers Speak Out
Judy Wolfe-Foster, sales and marketing manager for Mississauga, Ontario-based Thyssen Marathon Canada Ltd. - a tool steel supplier - feels that the tariffs will have some effect on the company's business. "These tariffs will definitely drive some price increases into the marketplace," she says, "especially since the tariffs are timed with a slight increase in demand for tooling materials. The market has rebounded somewhat back after a slow 2000-2001. Here in Canada, we've experienced a strengthening trend in the last three months of 2001. Business has recovered very nicely, although not to the level of the year 1999. Our business had been down about 20 percent and when you are off like that, it takes all of the cream off of your profitability. You have to be very cost efficient to come up with a positive result at the end of the year. But now we've seen a rebound - it seems like the market has gained 10 percent of our 20 percent loss, which is very encouraging. Tool steel always seems to be the first industry to go into recession, but then we're always the first ones out. So it's an indicator that when we come out, the economy is going to be pumping in six to eight months."
Sharing a similar philosophy is Cliff Moberg, president of Performance Alloys (Germantown, WI) - a supplier of beryllium-free copper alloys for use in constructing cavities, cores and inserts - who believes that the imposition of tariffs or quotas will only affect those already in trouble. "The ones who are going to suffer are the ones whose business methods have not evolved or use dated manufacturing styles," he notes. "It's really easy for business to go away and someone to stand there and say my business is gone and someone else has it. We have found that we have two kinds of customers: those that are hustling and getting work and those that are sitting in their shop complaining and waiting for work to come to them. I know companies that are very busy despite the economy and the global competition."
Wolfe-Foster adds, "From a North American standpoint, I think the world is a big place anyway, and we're going to lose business if the moldmaker in Japan does a better job than the moldmaker in North America. The steel is only 10 to 15 percent of the cost of building the tool. Asia is a big challenge for us, no doubt. I think that if foreign producers can't sell to the U.S., they will come and try more in Canada."
Expanding on these sentiments is Jeff Heissel, vice president and business area manager for plastics applications for tool steel supplier Bohler-Uddeholm North America (Rolling Meadows, IL). "The offshore tooling issue doesn't seem to be going away," he states. "A lot of good mold shops have gone by the wayside and it could be for a number of reasons, but it certainly doesn't help that a lot of these molds are being built offshore. The ones that are surviving are very innovative."
Thyssen's Wolfe-Foster sees the need for tool steel suppliers to expand their horizons. "In my opinion, the North American steel supply market has to have more focus on being value-added suppliers to their customers," she states. "In other words, we must make investments in our warehouses that provide value and solutions to our customers. We must take the time to understand the needs of our customers - whether it means investing in new technology like cutting systems to cut shapes to save on the tool builders' machine time, or simply doing the rough machining on their plates to save time. The old mentality of moving tonnage for the mill has to change. That will help everyone be more profitable and become better value suppliers to our customers."
Taking the complete opposite stance on the tariff issue is Tom Schade, executive vice president of International Mold Steel, a Florence, KY-based tool steel supplier. "It's absolutely ridiculous," he states. "I fought to have my exclusion honored, which it was. But, in my view, it won't make any difference. This will cripple the moldmakers - putting a tax on them to pay off the retirement costs of the USW and the large steel mills from bad contracts going back 40 years. These tariffs will be collected in Washington. Then a board may be set up similar to the National Railroad Retirement Act so that the retired United Steelworkers' retirement and health costs are paid for by the tariffs that are collected. That's what they want and they are getting a good hearing in DC because there are 700,000 retired steelworkers and 275,000 steelworkers."
Bohler-Uddeholm president Erik Svendsen agrees that the tariffs will have a trickle-down effect on the industry. "We certainly don't think it will do much good," he notes. "Steel prices will increase, with many suppliers having no choice but to pass this increase along to tool and die makers. Then tooling costs will be higher, which will further drive tooling out of the United States. In the end, it will mean loss of jobs in North America and higher prices to the consumer for the finished products. I do not understand why the government is doing this - many of the grades of steel under 201 are grades that are not being produced in North America. They are specialty grades with stringent requirements on either cleanliness or polishability."
Schade notes that two of his competitors that fought his exclusion request the hardest are being treated as domestic producers. "However, both import more steel in a month than I do in a year - but they all view this as an opportunity to raise prices and improve their cash flow," Schade contends. "They don't intend to make any more steel here - they will just keep bringing in what they are bringing in but sell it at a higher price. The loser in all of this is the mold and die shop. And if our customers go bankrupt, we can't be too far behind."
Bohler-Uddeholm's Svendsen agrees. "The majority of low-priced tool steel is being offered by the 'domestic producers' as they are among the biggest importers," he comments. "They hide under the name 'domestic producers' when in reality they only produce a limited amount of specialty grades."
Adds Schade, "As far as the moldmakers are concerned, tool steel should be excluded and there's more tool steel consumed in this country that is imported rather than manufactured here. That's not going to change, no matter what happens - nobody wants to make it here. Steel manufacturers are not going to invest the money in their mills to make them competitive. They are all looking at short-term relief to raise their prices, but what good will it do if you have no one to sell to? There are 12,900,000 steel-consuming jobs and 275,000 steel-producing jobs, and industry estimates say anywhere from two to 15 jobs lost in the steel-consuming side for every one job saved in the steel-producing side. So what's good about this? Nothing! It's like 1928 all over again. The stock market goes down, you throw up a trade barrier on imported products and the Europeans and Asians react in kind. Then there are trade wars and the next thing you know world commerce is going down the tubes and it causes a depression, which is already happening."
Jerry Lirette, president of D-M-E Co. (Madison Heights, MI) - a manufacturer and distributor of mold bases, mold tooling, mold components and electronic controls - also is concerned with the impact the tariffs/ quotas could have on U.S. moldmakers. "Moldmakers are already struggling with foreign competition," he says, "D-M-E has varied resources for steel - predominately on the U.S. market, but also on the world market under special conditions. It could have an impact on us, but we are most concerned about the impact on moldmakers. If a moldmaker has been using imported specialty steels, it would only take a marginal increase to make him unprofitable because moldmakers are operating on low margins already."
Moldmakers Share Views
Overall, those who are out in the trenches believe that the tariffs will have little or no impact on their businesses, largely because the tool steel is approximately four to seven percent of the total cost of designing and building a mold.
Norbert Stengel, CEO of Vernon Hills, IL-based Northwestern Tool & Die - a plastic injection moldmaker serving many industries, including medical - notes that he is going to purchase the best steel available, regardless of price. "If steel prices were to rise, we would pass the increase along to our customers," he states. "However, we a very labor-intensive industry, so the larger concern is labor. The cost of the steel that goes into our product is a very small percentage of the overall cost. Even if the cost of steel increases by 20 percent, our prices would only be affected by less than one percent."
Furthermore, Stengel notes the loss of industry jobs is not the fault of the steel industry but rather the fact that manufacturing is leaving this country and going overseas - taking tooling with it.
Having mixed feelings on the subject of tariffs/quotas is Scott Peters, sales and engineering manager for ProMold, Inc. (Cuyahoga Falls, OH) - a designer and builder of precision thermoplastic injection molds, extrusion and pultrusion dies, serving the electronics, aerospace and medical industries. He'd like to see them established - with limits. "In the past, the steel industry has received tax relief programs, then five years later they are crying that they are going to go belly up again," Peters notes. "So, perhaps relief should come in the form of federally subsidized loans that they have to pay back.
"I do feel bad for all of the steelworkers who have lost their pensions because of mismanagement and because people keep putting money back in their pockets instead of back in the mill," Peters continues. "But, it seems like the unions have allowed this to happen. We have all of these people who have literally put millions of dollars into 401(k) plans, employee-shared ownership programs and retirement packages of one form or another - only to have it evaporate in a matter of hours. And they shouldn't be left out in the cold - that's what social security was originally intended for. But it wasn't intended as a bailout or panacea for these people. The companies have really let them down, and I think the shareholders should be made to step up and reimburse these employees, but that'll never happen."
He then takes it one step further. "If they can impose a quota on steel I'd love to see them impose a quota on Canadian or Chinese molds - or any foreign molds for that matter - or anywhere we know they are practicing unfair trade policies," he affirms.
Another proponent of the tariffs is Kevin Hartsoe, president of Ivyland, PA-based Neu Dynamics Corp. - a manufacturer of precision molds and dies for the electronics industry. "I have looked at both sides of Section 201 and both sides have a very valid argument," Hartsoe states. "But, in all fairness, I have to side with putting the tariffs in place. My father and brother were steelworkers at U.S. Steel in Fairless Hills, PA, which at one time employed 8,000 people. It is closed now. I've read some of the retired workers who have been promised pension benefits are worried they might lose them."
Plus, Hartsoe is in favor of supporting American manufacturing - the company only buys steel manufactured in the United States. "Our molds are of such precision that we don't take a chance with steel; we've been burned a couple of times," he states. "So we actually pay a little bit more for steel than a normal person does. An average mold for us may be 800 to 1,200 hours, and when you put that much time into something, you need the steel to perform."
The Road Ahead
Not only is Bush's decision poised to have a dramatic impact on the steel and moldmaking industry, it also may affect his chances for reelection and could determine control of the closely divided chamber, according to political strategists. Plus, the ramifications could ultimately have some bearing on the war on terrorism. The European Union (EU) has warned that relations with the United States would suffer if the Bush administration imposed the tariffs. While European Commission President Romano Prodi did not mention specifics, the warning is ominous nonetheless.
Moberg of Performance Alloys also predicts an uncertain future. "These global issues are not going to go away - that's not going to happen," he comments. "It's hard for the President of the United States to be negotiating with foreign countries to support global defense issues and then say we are not going to buy your metal. Or, say, 'I'm sorry we have to limit the amount of metal coming in because we have to keep our small companies in business.' There's a variety of ways to have government subsidies, but that's a whole other matter."
International Mold Steel's Schade opts to be more optimistic. "The hidden benefit to the moldmakers might be that this will push them into trying some of the more technically advanced mold steels that supply a great deal of machine timesavings to offset material costs and they may find that there is life after P-20. Onward and upward."
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