President Trump announced on Thursday last week that a 25% tariff on goods from Mexico and Canada will be implemented on March 4. He also warned of an extra 10% tariff on Chinese imports, set to begin on the same date. This move is part of the broader Trump administration’s strategy to address issues such as drug trafficking and trade imbalances, despite ongoing diplomatic efforts with these nations.
The tariffs are expected to have profound economic implications, potentially leading to retaliatory measures from affected countries and impacting global markets.
Tariffs in Perspective
In light of these recent developments regarding tariffs on steel and aluminum imports from Mexico and Canada, it’s helpful to look back at what happened during the last major tariff increase in 2018. In March of that year, President Trump imposed tariffs of 25% on steel and 10% on aluminum, which later expanded to include the European Union, Canada, and Mexico. This move led to retaliatory tariffs from Canada and lasted until May 2019, when the U.S. lifted its tariffs.
Price Trends During Previous Tariffs
Even before the tariffs took effect in June 2018, markets began to price in the future impact of tariffs. During the first half of 2018, U.S. steel mills reported a 15% increase in product prices. Near year-end 2018, annualized price increases crested 20%; however, prices began to decline quickly thereafter. By the time tariffs were lifted in May 2019, the year-on-year price increase for steel structural shapes had dropped to just 1%. Prices continued to trend lower, eventually falling below pre-tariff levels in late 2019 and continuing to slide further through most of 2020.
One reason for the pricing changes was the increased capacity utilization of U.S. steel plants. In January 2018, the capacity utilization rate of iron and steel products plants hovered around 74%, that rate would exceed 80% by late 2018. Even after the tariffs were lifted such mills continued to operate above their pre-tariff utilization rates for another year and until COVID’s disrupted both the economy and steel production.
Impact on Construction
The rise in steel prices contributed to a 5.5% increase in overall construction project costs by late 2019, compared to just 3% at the beginning of 2018. There was about a nine-month delay from the peak of metal price increases to the peak rise in construction costs. It’s noteworthy that the effects of the 25% tariffs were mild compared to the drastic price fluctuations seen during the pandemic.
Current Expectations
Drawing from past experiences, we expect steel prices to remain relatively stable this time around. The price of hot-rolled coil has already increased by 32% since Trump’s second inauguration. This suggests that the market has already priced in much of the tariff’s anticipated impact, giving little reason to anticipate additional drastic price hikes moving forward.
However, ConstructConnect does expect construction project costs to rise due to higher steel prices. Current year-on-year construction inflation stands at 2%, higher steel prices could send that figure to between 4.5% and 5%.
The U.S. steel industry’s capacity utilization is currently around 70%, which is lower than 2018 levels. With ample capacity available, we anticipate that U.S. steel plants will increase production before the year’s end, which should help stabilize prices.
A Cautious Approach
Given this outlook, the best approach for construction professionals is to remain level-headed and measured in their responses to these events. Short-term volatility is not the best time to make long-term decisions that could lead to regrets. Since steel prices have already shifted significantly, it’s unlikely they will continue to rise sharply or remain high for long.
Lastly, in the post-COVID economy, many companies have improved their understanding of supply chains. We recommend revisiting best practices from that time to keep inventory levels in check and control costs effectively.
ConstructConnect chief economist Michael Guckes is regularly featured as an economics thought leader in national media, including USA Today, Construction Dive, and Marketplace from APM. He started in construction economics as a leading economist for the Ohio Department of Transportation.
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