Market commentary: Will tariff uncertainty choke off the perfect storm?

2018 was a good year for buyers of industrial piping—oil & gas firms being the prime example.

From what we can tell in early 2019, it’s clear that the circumstances that made last year profitable for those buyers are still in play today. And when those buyers are profitable, so are we.

But uncertainty around one factor—the Section 232 tariffs effective since last summer—could put suppliers in a pinch and throw cold water on our prediction that rising tides lift all boats.

And the weird thing is, it’s not that we’re worried the tariffs will remain in place.

We’re worried that they’ll be lifted.

The pieces are in place for another good year

As we stated above, things are looking up, especially in the oil and gas sector. Production in the U.S. is at his highest pace in decades. While world oil prices fell into a deep trough for a period last year, the cost per barrel again is inching upward.

We’re also keeping an eye on circumstances on the ground in west Texas. They’re currently facing what watchers call “the Permian pause.” Crude oil stockpiles are mounting because production in the oil-rich basin is exceeding available capacity to transport it to Gulf Coast refineries.

Even the American fossil fuel power generation sector, which has languished lately under regulatory pressure (and unfavorable public opinion) seems primed for a rebound if the current administration continues its rollback of emission enforcement.

Demand for piping products is currently strong, and we expect it to remain so. But the steel and aluminum tariffs levied on imports from traditionally friendly trade partners are the cause of an interesting thorn in the supply side of the equation.

Section 232 tariffs created a new normal

Prevailing wisdom holds that new tariffs slapped on old friends is unwise. It introduces uncertainty, and commodity markets don’t like when they can’t see past the glass of the crystal ball.

As suppliers of commodity steel piping products, it’s always easier to purchase and then price inventory when we have a decent idea of what’s around the corner. Tariffs make the future more difficult to predict. The one thing you could predict was that steel importers would pass the cost of the tariffs onto buyers.

But you can’t produce steel pipe overnight, so suppliers build inventories well in advance based on predictions of future need.

What happens if the tariffs are removed without warning? What happens when pipe we bought at tariff prices over the last nine months loses one-fifth of its value at the stroke of President Donald Trump’s pen?

Not long after the tariffs became effective, buyers and sellers stopped griping. Demand to complete projects requiring imported steel evidently has been strong enough to overcome the sudden added cost. Paying that extra tax is annoying, but buyers are paying it even so.

The tariffs created a new normal, and business has gone on as usual. But things will change if they disappear without warning. The going price for steel pipe would plummet to well below what suppliers had paid when stocking up, and customers will insist on buying at the lower cost.

What’s a supplier going to do? Refuse the sale? It only takes one supplier to say they’re willing to sell at a loss to kick off a race to see who can eat the most cost and call it new customer acquisition. It’s a dangerous game not everyone will survive.

We still believe 2019 will be a strong year—both for our customers and for ourselves—but it could also be rather volatile considering the tariffs and the uncertainty they bring to those affected by them.

Ironically, it might be better if they’re just left alone.

Opinions and analyses of current events presented in market commentaries do not reflect current prices for steel pipe or piping products in stock. For the latest pricing information, contact our sales staff at 1-800-316-5737 or request a quote.