Monday , March 12, 2018 - 12:40 PM
(c) 2018, The Washington Post.
JOPLIN, Mo. - By 9 a.m. Friday, Greg Scheurich already had fielded his fifth call of the day from a metals importer trying to determine how President Trump’s new tariffs would work.
“It’s really confusing, tough to understand,” said Scheurich, president of CNC Machine Products, a manufacturer of bearing components.
For Scheurich, the perplexing thing about Trump’s tariffs on imported steel is that, in the name of helping U.S. steel makers, the president may be dooming some other American companies like his.
In the nation’s capital, the new import taxes are viewed as a turn by the United States toward economic nationalism as well as a chance for the president to deliver on a promise to his working-class constituency.
But for Scheurich, 69, whose production of industrial parts depends almost entirely on importing specialized steel from Japan and Sweden, the restrictions on foreign-made metals pose a direct threat to his business. Though the president insists tariffs will force companies like his to “Buy American,” Scheurich confronts a more complex globalized reality.
“What people don’t understand about the steels I use is it doesn’t have anything to do with price. I’ve tried to find domestic sources,” he said. “ . . . I’m not importing it because of price. I’m importing it because of quality and (because) I can get it.”
Scheurich said he has to buy from foreign companies because decades of consolidation in the domestic steel industry have left few U.S. mills producing the high-quality steel he requires. The limited amount of American steel he can obtain too often has obvious flaws, he said.
The president’s 25 percent import tax will effectively cut him off from his steel suppliers and starve his business. CNC’s customers will buy their parts from manufacturers outside the U.S. rather than absorb his higher costs, he said.
“If they would give me options about where to go domestically - no problem!” he said. “I don’t think they understand; I got nowhere else to go.”
CNC is among scores of U.S. companies that depend upon foreign steel mills for specialized products they cannot obtain - or cannot obtain in sufficient quantities - at home. In the weeks ahead, they all will be lining up at the Commerce Department to seek relief from the president’s new trade barriers.
To endure a bearing’s wear and tear inside a construction vehicle, wind turbine or even a dental drill requires specific materials. The bars, tubings and forgings Scheurich uses to produce his components are made of a specialized steel bolstered, or alloyed, with elements such as nickel or chromium to enhance their strength and corrosion resistance.
As the domestic steel making industry has shrunk to a fewer number of companies, such specialized production has gotten squeezed. Only 7 percent of U.S. production is of alloy or stainless steel, according to Platts, a market research firm.
Oil pipeline companies, which need special gathering lines, casings and tubing made of alloy steel, have no choice but to look overseas. according to John Stoody, vice president of the Association of Oil Pipe Lines.
“Higher production costs for a niche market subject to cyclical swings in the oil sector led U.S. producers to shift to more higher volume and reliable products and markets,” Stoody said via email.
The U.S. migration away from such specialized production has been spurred by intense import competition. The U.S. last year imported more than 6.3 million tons of steel alloy products, up nearly 75 percent since 2002, according to the Commerce Department.That is a far faster rate than steel imports overall, which rose 16 percent during the same period to 34 million tons.
Even as U.S. demand for such products was growing, the number of specialty steel producers in the U.S. dropped by half since the 1970s, Denny Oates, chairman of an industry trade group, testified before a Commerce Department investigation last year. The industry blames dumping by foreign producers, especially from China.
“These producers have suffered from the problems of competition with subsidized and dumped imports, abetted by excess capacity abroad,” said Ron Lorentzen, a former Commerce Department trade official.
In November, the Commerce Department concluded that companies from Russia, Belarus and the United Arab Emirates were guilty of dumping carbon and alloy wire rod in the U.S. and assessed duties that exceeded 400 percent on some products.
Over his three decades at CNC’s helm, Scheurich has adapted to a series of competitive challenges.
In the late 1990s, Scheurich bought about half of his annual steel needs from U.S. mills. But today, he can obtain from U.S. mills only about 2 percent of his $10 million in annual steel purchases.
The quality of the domestic steel that Scheurich can acquire is often disappointing. Showing a visitor around his 50,000 square foot factory, Scheurich points out the differences between immaculate steel forgings from Japan and an American alternative.
“Look at this!” he says, pointing to visible imperfections in the surface of the U.S. product.
Along with foreign materials, Scheurich relies upon foreign technology to produce his customized parts. A new $1.5 million Japanese automated machine tool turns generic steel bars into precision crafted parts. A $275,000 robot is on order. Scheurich said he tries to replace his equipment every four or five years, to keep abreast of technology - something he says U.S. steel producers have failed to do.
Developing CNC’s border-straddling supply lines took time and was not without headaches. Scheurich’s customers require him to use certain mills and securing approval for a new one involves a cumbersome process that lasts at least six months.
He nurtured ties with his Swedish suppliers on annual moose-hunting excursions and forged relationships with Japanese executives over endless rounds of golf. When he first turned to Japanese mills, his father Raymond, a U.S. Air Force veteran of the war in the Pacific, stopped talking to him for a time.
Concern over the tariffs’ impact is evident on the factory floor, where workers average hourly wages of $16 to $20. Some wonder what will be the cost of the president’s effort to boost employment at steel mills and aluminum smelters.
“I can kind of see what they’re trying to do - make more jobs,” said Bobby Beyer, 21, a machine operator. “But at the same time, it’s also taking jobs away from other people.”
Across the floor, machinist Michael Elabed, 27, gestured toward his bosses and said: “If it hurts these guys, it hurts me.”
As the tariff imbroglio flared over the past week, Scheurich found himself monitoring events in Washington, including the visit of Sweden’s prime minister Stefan Lofven to the White House. Trump used the occasion to reassure his guest that he would impose the tariffs in “a very loving way.”
In his announcement, the president invited U.S. trading partners to haggle over whether they could find other ways to address U.S. security worries other than paying the new import taxes. He also set in motion a bureaucratic process that could determine whether CNC Machine Products lives or dies.
The company’s fortunes rest upon one paragraph in the proclamation the president signed Thursday, which authorized Commerce Secretary Wilbur Ross to establish a process for excluding from the tariffs any steel products “determined not to be produced in the United States in a sufficient and reasonably available amount or of a satisfactory quality.”
The Commerce Department has until March 18 to determine how to adjudicate exclusion requests. In 2002, the last time the U.S. imposed tariffs on imported steel, a similar process was established four months before the tariffs went into effect. President George W. Bush included the first group of exempted products in the tariff proclamation, allowing Scheurich’s production to proceed without interruption.
Today, he has enough inventory to cover the next few months, though less than he would like. He suspects his next shipment from Japan, due March 15, will be smaller than usual.
“It’s a bump in the road, but it’s a big one,” he said of the tariffs, standing in his factory. “If I can’t figure something out, we could close her down.”
Scheurich, and many of his employees, voted for Trump and remain supporters. He even likes the idea of tariffs, just targeted more narrowly at China. The president’s policies have aided the company, which booked about $22 million in revenue last year, he said.
Now, along with his son, Jeff, the company’s vice president for manufacturing, Scheurich is banking on the notion that the tariffs are just the visible element of a presidential negotiating strategy.
“I’m hoping there’s something behind it, which I think there is,” said Jeff, alluding to Trump’s self-image as a master negotiator.
“We’re hoping,” Scheurich said.
“We’re hoping,” his son repeated.
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