Nov 17, 2023

Steel Tariffs And Jobs: You Have To Look At The Whole Supply Chain

The Independent Can Company makes a wide range of cans with high-color graphics printed on ... [+] high-speed automated production lines.

A trade dispute over tinplated steel products opens up a can of worms. On one side, we have the domestic steelmaker Cleveland-Cliffs CLF , partnered with the United Steelworkers, who filed a petition with the U.S. International Trade Commission (USITC) seeking duties on imported tinplate that is used for making cans. They are trying to protect domestic jobs under threat from lower cost tinplate imports. On the other side, we have users of tinplate, including can manufacturers and producers of canned foods, for whom raising the cost of tinplate will mean canned food will cost more and domestic can makers and food processors will lose competitiveness and jobs to other countries. Making cans in the U.S. is a microcosm of how businesses cope with high domestic costs against foreign competition, and the trade issue reflects a regulatory regime that was only empowered to look at one step in a supply chain rather than the bigger picture.

Let’s start off with the stuff destined to be made into tin cans. Tinplate is steel coated with a thin layer of tin to prevent corrosion. Tin cans are widely used to package food, but they are also used for many other products. While most beverage cans have transitioned to aluminum, tinplate is still very popular where you need packaging with sufficient mechanical strength.

I wanted to talk to a domestic can manufacturer, so I called Rick Huether, President and CEO of Belcamp, Maryland based Independent Can Company. Independent has two factories in Maryland, two in Ohio, and one in Iowa. The company makes a wide variety of tin cans, for things like popcorn, infant formula, lip balms, pet products, games, and toys. Most of these have high-quality color graphics printed on them, although other cans without graphics such as those for military purposes, are in demand. “It's called a foxhole can, it's being used in Ukraine,” Huether explained. “You drop it on the ground, pull a fuse, run like hell, and you end up with a three-by-five foxhole.”

Tin cans are tough to manufacture competitively in the U.S. since the raw tinplate sheets are anywhere from 45% to as much as 80% of the total cost of the product. That means if tinplate suddenly doubles in price, your product will instantly cost as much as 60% more, which will be more than you sell the product for. According to Huether, tinplate prices in the U.S. are already the highest in the world, ranging from $2,000 - $2,200 per ton, having increased 100% over the last four years. Tinplate from most of the rest of the world costs 20 – 30% less. While he didn’t quote prices from China, one could order it online for $480 - $780 per ton.

The cost challenge facing domestic can manufacturers mirrors the problem that faces any manufacturer where steel is a major part of their bill of materials (BOM) cost. The BOM is a list of all the raw materials, sub-assemblies, and other parts and quantities of each needed to make a product. I was visiting a construction equipment maker in China several years ago. They explained that 50% of their BOM cost was medium carbon steel. That was even before they cut it and shaped it into the parts they needed. At the time, the grade of steel they were using was $600 a ton in China and $1,100 a ton in the U.S., meaning even before labor and other costs their Chinese product was much cheaper on the world market. This is something I struggled to understand, since Chinese steelmakers buy iron ore at global market prices, they buy coking coal and presumably energy at something close to global market prices as well. Nonetheless, this explains why U.S. construction equipment makers must produce offshore to serve foreign markets; exporting from the U.S. would be challenging unless it was a unique piece of equipment that no one else made.

Domestic can manufacturers have to focus. If you are making cans for packing food, you rely on the fact that it costs a lot to ship empty cans from Asia because you ship a lot of air. Of course, if the cost of domestic cans gets high enough, food manufacturers will start shifting the production of canned foods offshore. Offshore could mean Canada and Mexico, who are already large growers of fruit and vegetables for the U.S. market, as well as places like Türkiye, Italy, or of course China.

Can closure production at Independent's Vandalia, Ohio factory

The other thing you can do is specialize. Independent doesn’t make “sanitary” cans used for packing food or beverages, rather it focuses on higher value cans that leverage custom printing. Independent Can does everything from two-color to nine-color printing, and has the only nine-color printing line in the Western Hemisphere. It can print 8,000 sheets an hour on a 48 inch-wide coil, and relies on heavy automation to keep its costs down. “We made a commitment to our employees and to the markets we serve that we we’re going to make cans in America with American workers for the American markets,” Huether explained. “Our goal is to automate to keep our costs down.” Independent’s employee population has grown from 60 in 1975 to 410 today. “We do it through automation, technology, and capability,” Huether added.

In January of this year, Cleveland-Cliffs and the United Steelworkers (United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union) filed a petition with the USITC to impose anti-dumping duties on imports of certain tin mill products from Canada, China, Germany, South Korea, the Netherlands, Taiwan, Turkey, and the United Kingdom, as well as countervailing duties on imports from China. In February, the U.S. Department of Commerce initiated an anti-dumping investigation. Commerce is scheduled to make its preliminary decision on August 15th and final orders could come out laters this year or early next year.

Domestic steelmakers have underinvested in the segment and don’t produce steel to the specifications that some can makers need. Cleveland Cliffs and U.S. Steel only make about half of the tinplate consumed by domestic can makers. Independent Can uses machines that consume 48-inch-wide coils, but domestic tinplate producers only make 39-inch-wide coils. “We would be wasting 20% of the capacity … that adds to our costs,” Huether explained. The other issue is quality. Premium can making requires careful control of the metallurgy – consistent thickness and composition across the sheet. “We need dead flat that is consistent coil to coil, because we might run two to three million units a day.”

Twenty years ago, Independent sourced all its steel domestically. But as they got into higher volume, higher value products, they needed higher quality tinplate, so they turned to German and other U.S. allied suppliers. They still use domestic suppliers, but during the pandemic domestic tinplate producers chose to focus more on high volume food can makers so Independent had trouble getting material. One of the domestic suppliers wouldn’t accept any orders, the other only delivered product on time 20% of the time.

This problem is complicated for several reasons. First, in defense of domestic steelmakers, they have been under pressure from lower cost imports since I was in grade school, which trust me was a long time ago. Back then they were saddled with older production technology while foreign competitors who rebuilt after World War II had newer facilities that could make better product less expensively. Big integrated domestic makers have invested, but under continuous cost pressure which has constrained what they can do. A significant portion of this investment has been in electric arc furnace (EAF) steel-making, which is one reason the American steel industry is relatively low on carbon emissions. But EAF steel uses scrap as a primary feedstock, and the output has not been yet been proven to be usable for tinplate. Domestic steelmakers have also shed less profitable product lines and factories, which makes economic sense. But faced with international competition, the USITC filing is a tool available to them to use. This isn’t much help to domestic users of steel products, as we see with Independent Can.

Second, the USITC faces a complicated situation. The filing was under Section 301 of the Trade act of 1974, and while it doesn’t limit the scope of the government’s investigations, the Congressional Research Service cites several things that could be subject to an investigation: (1) violations that deny U.S. rights under a trade agreement, (2) an “unjustifable” action that “burdens or restricts” U.S. Commerce, and (3) an “unreasonable” or “discriminatory” action that “burdens or restricts” U.S. commerce.” That requires a lot of interpretation, and allies like everyone on the list except China might have a problem with this. The law was written before the era of globally interconnected multi-tier supply chains, but using it to pick at only one tier (tinplate) risks missing the forest for the trees.

Long-term, the critical question is what can the U.S. do to ensure that its steelmakers are globally competitive? It’s more than a question of higher labor costs in the U.S., it’s also a question of investment climate and ensuring steelmakers have the ability to invest in making their products better and more responsive to the needs of their customers, both domestic and international. If we don’t step up to this problem, we’re just kicking the can down the road.