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The fuse is lit and now the clock ticks. After President Trump signed a pair of proclamations on Thursday, barring any unforeseen legal challenges, we have fifteen days until a pair of tariffs on steel and aluminum go into effect. From price and employment fluctuations to a potential trade war, the economic consequences of this effort are yet to be determined, but its impact is expected to be as far-reaching as it is convoluted. While it is impossible to predict exactly how everything will shake out, one industry that is likely to see a clear benefit is vehicle recycling.
Impacts mixed across and within slices of the economy
In the most directly impacted industries, the tariffs have pitted nominal partners against each other. American steel and aluminum producers are naturally very excited by this development while their customers, American steel and aluminum consumers, are dreading the disruption it may cause. Steel union bosses are looking forward to improved conditions for their workers, while labor leaders in other parts of the economy are concerned by the specter of offshoring.
For defense contractors, the struggle will be fully realized within the confines of any singular company entity. If all goes according to plan, the Chief Financial Officer will suffer through seeing steel and aluminum prices rise, while the Chief Risk Officer will look forward to more diversity and security of materials suppliers.
Beyond the directly impacted industries, sentiment is broadly negative. Farmers are always the first victims of a trade war, as they produce commodity goods with long production lead times and have high switching costs. Consumer advocates are always bearish on tariffs, as even in the very best-case scenario, prices for goods will rise due to the increased cost of production. And the potential fallout is not limited to the marketplace, as political strategists fear the repercussions of isolationist policies will extend beyond simple tit-for-tat trade wars.
However, one often overlooked segment of the economy is likely to see only a benefit from the tariffs. That segment is the raw material suppliers of steel and aluminum, specifically mining and metal recycling. If the demand for processed domestic metals increases as expected, it will drive prices up for raw materials. For miners, this means more profit on what they are already producing and likely increased production beyond their current output. For metal recyclers, the dynamics are more complicated but still broadly positive.
Breaking it down; best-, middle-, and worst-case scenarios for vehicle recycling
Metal recycling, especially the portion derived from vehicle recycling, sits at a nexus between individual consumers and large companies that can span multiple countries and continents. And the volume of activity can be staggering, as it is estimated that vehicle recycling accounts for forty percent of the ferrous scrap in North America. While it is not the majority of the industry and ignores the second tariff completely, for the purposes of this article, focusing on this portion of the supply chain is particularly instructive and illuminates the complex dynamics of a new tariff.
Let’s imagine a situation in which there are thousands of individual consumers with scrap vehicles (or vehicles about to be scrapped), a handful of companies offering metal recycling, and both a handful of domestic steel manufacturers and a handful of foreign steel manufacturers. Imposing a tariff on finished steel products can impact these companies in a variety of ways, which we will explore from the perspective of the recyclers in the three scenarios below:
Steel product consumers continue to produce at the same volume and pass on the price increases to their customers. Domestic steel prices go up, increasing demand and therefore prices for raw steel. Mining operations are unable to adjust capacity quickly enough to meet the increased demand. Metal recyclers compete by raising bids to win more cars. Scrap(-to-be) vehicle owners are price sensitive and therefore more willing to turn their vehicles over at the higher bids. Metal recyclers also find it more profitable to keep scrap domestic and shifts volumes away from exports. The freight system has slack and is therefore willing to handle increased volumes without raising rates.
- Impact on metal recyclers: It is a little more work across the board, but you will not hear any metal recyclers complaining. All the raw material they are currently selling is going to be more profitable, and every conversation they have with a potential scrap vehicle seller is going to be that much easier.
- Impact on scrap vehicle owners: Ka-ching! Higher demand for raw materials drives up the prices of scrap cars. This means your junk just appreciated $50 in a day, and all you had to do was nothing. There's a higher payout waiting for you at car junkyards.
Steel product consumers cut production on the margins as their customers refuse to pay significantly higher prices. Domestic steel prices go up a bit, but demand does not increase at a 1:1 ratio replacing imported steel. Mining operations are able to boost production and meet a portion of the demand. Metal recyclers are still able to raise bids to win more cars, but only by a fraction. Scrap(-to-be) vehicle owners are mildly price sensitive and therefore volumes do not increase significantly. The freight system is near capacity in a healthy economy and recyclers must compete with miners for open cars.
- Impact on metal recyclers: There is a little more work across the board, but between increased competition for scrap, higher logistics costs, and only slightly higher demand, the impact is marginal. Steady-state raw materials sales will be slightly more profitable, but any additional production will be offset by higher logistics costs.
- Impact on scrap vehicle owners: Ding! Enjoy the extra Redbox rental you’ll get with that $5.
Steel product consumers are forced to move operations offshore as rising material costs crush margins and customers are unwilling to pay higher prices. Domestic steel prices actually fall as demand craters. Mining operations continue to churn out ore at the same rate as they have already invested in digging and equipment. Metal recyclers lower bids to protect their own margins. Scrap(-to-be) vehicle owners are price sensitive and decide to keep repairing their car until scrap prices recover. The freight system rusts over due to lack of utilization and are forced to charge higher prices to cover the cost of rust removal.
- Impact on metal recyclers: The dark days between the start of the Great Recession and the introduction of Cash for Cars return. Volumes are low and margins are even lower. The patches of visible dirt are growing as scrap piles shrink. The numbers guy is running another new analysis to determine whether to hold or to ship it all, and he does not look happy. He eats lunch alone.
- Impact on scrap vehicle owners: Might be time to invest in a new sound system, as the scream of that belt is only going to get louder and louder. On the plus side, your car will soon qualify for exemption from smog checks at the DMV!
Trump Tariffs: What Can We Take Away?
As you can see, there is a wide (some may say exaggerated) range of possible scenarios that may occur as a result of the tariffs on steel and aluminum. As usual, the actual impact will likely lie somewhere in the middle of all the doom and gloom you hear from various media outlets.
More importantly, the lesson that readers should take away from this article is that government interference in the market is never simple and clean cut. This is not a value judgement, but rather a reminder that the free market is far too complex and interwoven to allow for targeted adjustments from an outside actor without unforeseen consequences. A politician may sell their proposal as a simple fix, but in reality they are never certain what will happen. For instance, such was the case when the Cash for Clunkers program was established to stimulate auto sales, only for it to be "scrapped" a mere two months later.
As the fuse burns down until the tariffs take effect, it is also important to remember that all of the impacts take time to be seen. Just as the size and scope of the impacts can vary from small to large, the speed can vary from fast to very slow. If the middle case plays out (some price and production changes on the margin), it will likely happen in fits and starts over weeks, months, and possibly years.