May 2020 Market Update

With unemployment numbers approaching levels last seen during the Great Depression, parts of the United States are tentatively trying to restart their economies, though COVID-19 remains a threat.

The U.S. economy lost more than 20 million jobs in April, driving the unemployment rate to 14.7 percent, the highest since the 1930s and more than quadruple what it had been for most of last year and the start of this one, the Bureau of Labor Statistics reported.

“The changes in these measures reflect the effects of the coronavirus (COVID-19) pandemic and efforts to contain it,” the bureau noted. “Employment fell sharply in all major industry sectors, with particularly heavy job losses in leisure and hospitality.”

Even the dismal April figure does not actually capture the true state of the nation’s unemployment since job reductions continued after the bureau completed its surveys in the middle of the month. Treasury Secretary Steven Mnuchin said on the May 10 edition of “Fox News Sunday” that the unemployment rate is actually “close to 25 percent at this point, which is Great Depression neighborhood.”

During the Great Recession, the worst unemployment rate was 10 percent in October 2009.

In terms of gross domestic product, the U.S. economy recorded its first decline since 2014 and its worst quarter in more than a decade, shrinking by an annualized rate of 4.8 percent, according to the Bureau of Economic Analysis. Again, however, this statistic greatly understates the situation, since it measures economic activity during the first three months of the year, and the shutdowns began in March.

The April to June period is expected to be historically bad, with a contraction well into double digits being widely predicted.

Amid the undeniably bad statistics, members of the Trump administration are trying to stay optimistic. One of President Trump’s top economic advisors, Larry Kudlow, suggested on ABC’s This Week on May 10 that the unemployment numbers contained “a glimmer of hope.”

“Eighty percent of [the job losses were] furloughs and temporary layoffs,” Kudlow said. “That, by the way, doesn’t assure that you’ll go back to a job, but it suggests strongly that the cord between the worker and the business is still intact.”

Mnuchin, meanwhile, forecast a strong summer, aided by federal relief and stimulus programs, during an April 26 appearance on Fox News Sunday.

“I think as we begin to reopen the economy in May and June, you’re going to see the economy really bounce back in July, August, September,” Mnuchin said. “And we are putting in an unprecedented amount of fiscal relief into the economy. You’re seeing trillions of dollars that’s making its way into the economy, and I think this is going to have a significant impact.”

In addition to Congress appropriating close to $3 trillion to help businesses and individuals hold out for a few months, the Federal Reserve has been trying to ease disruptions by, among other things, holding the target range for the federal funds rate at 0 to 0.25 percent, offering loans to states and cities – though not at great rates – and continuing “to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.”

While many governors are either reopening their states or announcing phased plans to do so soon, the spread of coronavirus in the United States has not been significantly abated, and even the administration itself is projecting that daily deaths from the virus will continue to grow into June, according to an early May internal document reported on by The New York Times. The mid-range of the projections in that document was about 3,000 deaths per day by June 1. However, as with many models, the spread of possible results was wide. In the 25 to 75 percent likelihood range, daily deaths at the beginning of June could be as low as 750 or as high as 9,000.

Critics of efforts to quickly return to normal argue that the increased public interaction could push the death toll to the higher end of that range. If that happens, officials might once again shut down businesses and issue stay-at-home orders, but even without official decrees, the economic damage could continue if consumers do not feel safe enough to leave their houses as much as they did just two months ago.

Not surprisingly, confidence indices have plummeted recently, with The Conference Board’s Consumer Confidence Index dropping from 118.8 in March to 86.9 in April. Another Conference Board measure, the Present Situation Index – which is based on consumers’ assessment of current business and labor market conditions – fell from 166.7 to 76.4. Notably, though, the board’s Expectations Index – which is based on consumers’ short-term outlook for income, business and labor market conditions – improved from 86.8 in March to 93.8 in April.

“The 90-point drop in the Present Situation Index, the largest on record, reflects the sharp contraction in economic activity and surge in unemployment claims brought about by the COVID-19 crisis,” the board’s senior director of economic indicators said. “Consumers’ short-term expectations for the economy and labor market improved, likely prompted by the possibility that stay-at-home restrictions will loosen soon, along with a reopening of the economy. However, consumers were less optimistic about their financial prospects and this could have repercussions for spending as the recovery takes hold. The uncertainty of the economic effects of COVID-19 will likely cause expectations to fluctuate in the months ahead.”

Similarly, the University of Michigan’s Index of Consumer Sentiment dropped from 89.1 in March to 71.8 in April, while its gauge of Current Economic Conditions fell from 103.7 to 74.3. The university’s Index of Consumer Expectations, though, took a much smaller hit, sliding from 79.7 to 70.1.

“While the decline in both [latter two] indices indicates an ongoing recession, the gap reflects the anticipated cyclical nature of the coronavirus,” the Index’s chief economist said. “In the weeks ahead, as several states reopen their economies, more information will reach consumers about how reopening could cause a resurgence in coronavirus infections. Consumers’ reactions to relaxing restrictions will be critical, either putting further pressure on states to reopen their economies, or exerting added pressure to extend the restrictions even if it has negative consequences for economic prospects.”

In the manufacturing sector, the Institute for Supply Management’s Purchasing Managers Index declined from 49.1 in March to 41.5 in April. (A reading below 50 indicates that the manufacturing economy is contracting, while an index below 42.9 indicates overall economic recession.) Out of 18 manufacturing industries surveyed for the index, only two reported growth – one, paper products and two, food, beverage and tobacco products.

“Comments from the panel were strongly negative (three negative comments for every one positive comment) regarding the near-term outlook, with sentiment clearly impacted by the coronavirus (COVID-19) pandemic and continuing energy market recession,” the chair of the institute’s Manufacturing Business Survey Committee said.

After losing 37 percent of its value between Feb. 12 and March 23, the Dow Jones Industrial Average regained some ground and closed April at 24,345.72, up nearly 31 percent from its low point a few weeks earlier. The S&P 500 Index likewise partially recovered from a nearly 34 percent drop in the early weeks of the pandemic to end April at 2,912.43, 30 percent higher than its March 23 close.

The dollar has remained strong and was trading at 0.91 euros, 0.79 pounds, 106.99 yen and 7.06 yuan on April 30.

In early April, Bloomberg published a column about the ways in which economists and epidemiologists tend to view the pandemic and responses to it very differently. “Unlike epidemiologists, who identify a biological enemy and try to defeat it without thinking much about the costs, economists live on trade-offs,” the columnist wrote. “It’s an article of faith for economists that there is no such thing as an absolute value – not even the value of human life.” During the past two months, the United States and the world have traded the economic stability of a massive number of people for the lives of a smaller but likely still large group. Those choices have not been easy, but they are only going to get harder as the terms of the exchange worsen and – whatever course is selected – the lives of some are saved while others die as a result. In early May, CBS reported that, “The United Nations World Food Program (WFP) has warned that by the end of the year, more than 260 million people will face starvation – double last year’s figures.” The program’s director warned of famines “of biblical proportions within a few short months” and added, “There’s a real danger that more people could potentially die from the economic impact of COVID-19 than from the virus itself.” As a temporary measure, the shutdown was a not inappropriate response to a situation in which there were many unknowns and the cost of inaction threatened to be disastrous. But just as an unchecked pandemic can grow sharply, so too can the costs of trying to contain it – in lives as well as dollars. Failing to consider the second and third-order effects of pandemic responses abandons the principles of risk management and is both bad economics and bad for public health.
May 2020 Steel Shorts
Credit Suisse Sees “Perfect Storm” Threatening Domestic Steel Companies

The domestic steel industry is heading into “a perfect storm,” according to Credit Suisse.

An analyst with the bank noted in April that plummeting demand caused by the COVID-19 pandemic combined with more steel capacity coming online in 2021 will create significant hardships for steel producers.

“In our view, the impact of COVID-19 and the collapse of US energy is a black swan event for domestic steel companies for which recovery will take time,” the analyst wrote, according to “However, time is running out on the shot clock as 8 million tons of new sheet capacity is set to enter the US over the next 12 months to 18 months. This is a perfect storm for steel companies, which have a high degree of operating leverage and rising financial leverage via major capital investment plans and or acquisitions.”

The analyst projected that demand for vehicles will drop by as much as 90 percent during the current quarter. The automotive sector accounts for more than one-fourth of steel consumption in the United States. The energy sector is responsible for about 8 percent.

U.S. Steel to Lay Off Nearly 10% of Employees

U.S. Steel announced in April that it plans to lay off about one-tenth of its workforce.

With the COVID-19 pandemic devastating demand, U.S. Steel, which has idled most of its blast furnaces, said that it will lay off 2,700 employees, several news outlets reported.

Company President and CEO David Burritt indicated that the layoffs are part of “a series of actions in response to the coronavirus pandemic and the significant changes in the global oil and gas markets.”

“As the impacts from these unprecedented market dynamics became apparent, we adjusted our footprint, fortified our balance sheet and aggressively cut costs,” he said, according to The Telegraph. “While these decisive actions helped us exceed our first quarter guidance, we have quickly turned our attention to the second quarter to not only ensure the safety and health of our employees but also to preserve cash and liquidity.”

He noted, though, that, “challenging days are ahead.”

EU Considering Steel Import Cuts

The European Union is considering additional restrictions on steel imports, in part because of the COVID-19 pandemic.

In 2018, the European Union implemented “safeguard” tariffs, which are still in place, that are triggered when imports exceed a certain threshold. This was done in response to concerns that the tariffs imposed by the United States would lead steel-producing countries to dramatically increase their shipments to Europe. Now, EU officials are concerned that the steel being stockpiled while much of the world economy is shut down will flood the European market when conditions return to normal.

“We are looking at the review of the [existing] steel safeguards in this context,” the union’s trade commissioner told the European Parliament in April, according to Reuters. He warned that, “Certain third-country exporters may well decide to sell their product at below cost or at all cost or at any cost, with a view to gaining larger stakes in a smaller EU market.”

Eurofer, the European steel association, asked officials in an April letter to reduce import quotas by 75 percent during the second and third quarters of this year.

“The economy has changed fundamentally,” Eurofer stated, according to Bloomberg. “This radically different situation means that urgent action is needed.”

Commerce Department Investigating Imports of Steel Cylinders from China

The U.S. Department of Commerce on April 17 announced the initiation of antidumping and countervailing duty investigations of imports of non-refillable steel cylinders from China.

The investigations are in response to petitions filed by Worthington Industries of Columbus, Ohio.

The alleged dumping margin is 53.76 percent, and it is alleged that 21 subsidy programs support the production of the Chinese cylinders.

In 2019, imports of non-refillable steel cylinders from China were valued at $21.5 million.

USMCA Scheduled to Replace NAFTA July 1, 2020 – Trade and Trading Partners Express Concern

The United States-Mexico-Canada Trade Agreement has been ratified by all three countries, and despite concerns raised by Congress, industry, and Canada and Mexico, is scheduled to go into force on July 1, 2020. The concerns that have been raised relate to the range of actions that must be taken by all parties despite limited resources due to the COVID-19 pandemic.

Each of the three countries is required to develop and complete implementing regulations. The new, complex General Note to the tariff must be published. Neither has occurred as of May 8. Other actions regarding labor certifications, intellectual property and environmental rules, and e-commerce rules must be taken. Importers and exporters must conduct analyses and prepare preference certifications.

There are many changes between NAFTA and the USMCA that will require exporters and importers to modify procedures, recognize new requirements, learn new Rules of Origin, and understand what changes may affect them. U. S. Customs and Border Protection (CBP) has published Interim Implementation Instructions, specifically stated to be a “Guidance Document” and not the official final rules. These Instructions do provide some insight into how the changes will be implemented.

One significant change is in the legal responsibility for certifying that a product meets the criteria for preference treatment. Under USMCA it is the importer that bears the liability, although the actual certification can be made by the manufacturer, suppler, or importer. There is also no longer any formal Certificate. (Because the USMCA completely replaces NAFTA, all documents and materials developed under NAFTA, including NAFTA Certificates, are of no force or effect in the USMCA.) The importer must have in its possession at the time of entry information meeting the requirements in order to claim preference status. As stated in the Interim Instructions: “The certification need not be in a prescribed format; it may be provided on an invoice or any other document, except a commercial document issued in a non-Party, may be submitted electronically, and may cover a single importation or multiple importations of identical goods within a maximum 12-month period. The certification must contain a set of minimum data elements as set out in Annex 5-A of the Agreement (Appendix III of these Instructions) that indicate that the good is both originating and meets other applicable requirements.”

If the importer does not have the required information in its possession at the time of entry, a preference claim can be filed at a later time when the information is available. However, the exemption covering the Merchandise Processing Fee (MPF) applies only at the time of entry. Duties, but not the fee, can be refunded based on a subsequent claim.

Many companies, and particularly the automotive and auto parts companies, are quite concerned due to the large number of products that require certification, the limited time available before implementation, and workforce restrictions due to COVID-19. So far, at least, requests to allow the use of existing NAFTA certificates until the end of the year have not been granted.

Steel traders should be aware of the special certification requirements for steel content in automotive products. See Appendix I to the Interim Instructions for a list of products. Automobile producers will require more specific origin information in order to complete the necessary certifications. There are also changes to the Rules of Origin for many steel products in Chapter 73 of the Tariff, although most of these changes will be phased in during the years after initial implementation.

CBP is expected to use flexibility as the new rules go into effect, but the responsibility to comply with the requirements of USMCA will start on the implementation date.

Please take care of yourselves and everyone in the trade community at this trying time.

Steven W. Baker
AIIS Customs Committee Chair
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