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OMG, Trump got elected and “The end is near!” was the popular refrain. At least that was the narrative orchestrated by the media who successfully exploits the reality that most don’t think for themselves, read for themselves or, perhaps most troubling, conclude for themselves. Granted, President Trump does have this unmatched ability to place a target on himself.
However, my purpose is not to invite the vitriol of the political debate, which has become redundant, but rather offer a few observations, and here’s the differentiator; these observations will be based in facts. Remember, outside of our industry, I am on a college campus where we, in business, are often cast as the anti-Christ, so I don’t want to defend the often difficult-to-defend President Trump but rather applaud that which is good for our industry and also overdue.
I believe every college commencement speaker should conclude with the admonition: “Never confuse an opinion for intelligence.” I suppose this is the modern-day version of, “Everybody is entitled to their own opinion but not their own facts.”
The fact is, gross domestic product is at a historic high of $18.6 trillion. Growth is the strongest in three decades and expected to exceed 4 percent. Remember, that is 4 percent of a large numerator. Employment is greater than “full” in many geographic locations, as full employment is considered by economists at 4 percent unemployment. Therefore, if a particular geography has 2 percent unemployment, it is effectively operating at 102 percent of labor capacity.
I can give you the algorithm to determine full employment, which is confirmed by wage inflation; however, a more efficient way is to simply ask yourself: “As a consumer, how is my service?” If your service is crap, then you know we are at full employment.
By the way, the stock market hit an all-time high of 2,872.87 (S&P 500) on Jan. 26 of this year and, notwithstanding an anemic second quarter, it is at 97.2 percent of that high. The Dow itself is up 34 percent since President Trump’s election. Just take a peek at those 401k and IRA balances for validation. Success fueled by manufacturing optimism, infrastructure funding, tax reduction and regulatory mitigation.
As has been noted: “A nation needs to make things, and also needs to make the machines that make things.” It’s been decades since anyone in the beltway gave a damn about what we do. I believe our industry is indeed relevant. As you know, our nation cannot replace manufacturing jobs at $70,000 a year with greeters at big-box retailers making $25,000 and expect to maintain our economy, as 69.5 percent of that $18 trillion GDP is comprised of consumer spending.
Of course, you understand what is known as the multiplier effect, where one manufacturing job begets multiple service jobs. Peter Navarro said, “Manufacturing is the seed corn for other jobs in the U.S.” Finally, we have an administration that gets and values what we do, that understands our multiplier role in the economy. Infrastructure is finally getting funding and trade policy is being enforced. Such cannot occur without a PVF industry.
Free Trade, Fair Trade
There are two macro-economic camps: One is free traders and the other is the protectionists. I am a free trader, and if another country can make a product (steel or PVF) better than or as good as we do in this county, but cheaper, we should lose! The lost market share is our motivation to get better.
However, free trade is not necessarily fair trade and that is our issue. In the span of my steel industry career, domestic manufacturers have lowered the man hours to produce a ton of steel from 12 man-hours in open hearth technology to eight man-hours in a basic oxygen, then down to four man-hours with continuous casting and now down to 0.75 man-hour (45 man-minutes) with electronic arc technology. In fact, in our most efficient mills, a ton of American steel can now be produced in 15 minutes.
To achieve this world-class progress, billions of dollars have been invested. This results in increased depreciation costs and, of course, a shareholder expectation of a return on that investment. A loose but historic general rule of thumb was a mill would achieve a breakeven at $600 per ton and 80 percent capacity utilization. This is affected greatly by input costs, which tend to be volatile. So, allow me to offer the aforementioned as simply a reference point.
Graphs 1 and 2 are validations of the efficiency gained that, in turn, render us world-class competitive if trade is fair … only if trade is fair.
I understand that our customers who must sell in the global market and compete on the world stage must also source on the world stage. Due to specific product chemistries, availability or cost, a percentage of my inventory is foreign, as that is what is required by our customers, but the trade issue is legitimate. The current administration has finally said enough is enough — no more dumping. In effect, no more cheating. With the U.S. Commerce Department flush with friends of steel, we launch worldwide tariffs at 23 percent on carbon and 13 percent on stainless.
Yes, some of the countries initially included are certainly friends of ours, such as Canada and Mexico. Others included pose little threat such as the Vietnams; however, for the first time we are getting ahead of the loopholes where subsidized steel from, oh, let’s say China, makes its way to the United States via Vietnam. The world reacts to the administration’s move by the implementation of retaliatory tariffs. The Trump administration ramps up the pucker factor by considering quotas in addition to the tariffs, and a very dangerous trade war is launched.
I believe ground zero or the “Enough is enough!” cry from our industry started in 2015 when carbon hot bands hit $355 per ton. A nonsustainable number by any measure, yet in December 2015, China steel was hitting our shores at a ridiculous $225 per ton (Graph 3).
I don’t want a protracted trade war. However, in an attempt to reset to a more level playing field, something big, bold and controversial needed to occur. To do such, we needed someone big, bold and controversial, which is precisely what we have in President Trump.
The administration is now surgically allowing appropriate exemptions of the tariffs to our friends. I do hope level heads prevail before an all-out trade war begins. Our industry is not asking for protection per se but rather the enforcement of international trade laws. Fact is, we are competing against some that cheat and the refs need to throw the flag. We no longer can afford to play the role of the world’s dumping ground.
Admittedly, we don’t deserve excess profits but given our industries, investments and risk absorption, we indeed deserve “a” profit. It is said that over every 10-year period, our industry has two good years, two terrible years and six mediocre years. We are now in the two-year good window. Enjoy, as these will be the good old days we will soon long for.
Finally, we have an administration that understands the importance of what we do and is strong enough to enforce those existing trade laws. In the end, it is easier for us to invest in our industry with a better degree of certainty — a confidence and certainty long overdue.
Sometimes the best part of my job is the chair that swivels.