November 2021 Volume 3

WASHINGTON UPDATE

Lantto: I agree. We really haven't felt the effects of requests for quotes, orders or changes coming in, because we've always been competing with offshore companies, primarily China. And that's mostly due to the fact that they can create a final component for what we have to pay in raw material alone. That’s not true for other companies though – many are affected by the tariffs. Part of the challenge is that the forging industry has had a lot of different experiences with the tariffs. The problem right now and what it has been over the past year or so has really been the long-term impact of steelmaking capacity moving offshore. FIAMagazine: So it's not an order issue, it is a supply issue? Lantto: Correct. I think a lot of orders are going offshore that could be staying onshore, but we have not seen that direct effect from the tariffs specifically. FIA Magazine: Is this offshoring of production a tariff issue or is it a capacity issue for American steel manufacturers who are supposed to benefit from these tariffs not being able to keep up with demand? Calle: I would not frame it that way. Before the tariffs were put in place, our threat came from the importing of already forged components, not of raw steel for our forging processes. The effect of the tariffs has been mostly on the sheet metal steel mills because SBQ imports of raw material only accounted for around 10 percent of consumption of SBQ in North America. Sheet metal (we're talking coils of sheet metal) accounted for a much greater percentage of imports. The tariffs protected the sheet metal steel mills. It did nothing for SBQ. The SBQmills were never really under threat. FIA Magazine: As I then understand it, Section 232 may not have a direct effect on Trenton Forging because your products aren't getting tariffed, but it is having a direct effect on your ability to get the raw material to produce your products and fulfill your orders because the companies are slow on producing SBQ as they're trying to focus on increasing capacity of sheet metal. Is that a fair assessment? Calle: It is. I would add that we are under threat by not having a tariff on the finished goods. Let’s say tomorrow tariffs are imposed on imported forgings driving our customers to sourcing locally; the immediate effect would be that there's not sufficient SBQproduction capacity to support the additional volume of forging orders. FIA Magazine: Steel prices are through the roof and it is taking a long time to fulfill orders. Do you think the current situation on prices is being driven by tariffs or would we have this demand and this supply chain problem absent these tariffs? Lantto: I think we would still have these problems absent these tariffs. We have been doing a lot of meetings with steel mills that we source from trying to piece together what the heck is going on in the market. The best hunch we have is that there was a demand after the COVID lockdowns that ended up being a lot steeper than what mills originally thought. In addition to that, we think that the microchips shortage is masking some of the SBQ shortage issues. Though everybody's talking about chips right now, they may not be really noticing the supply chain issues when it comes to SBQ. I think that regardless of the tariff situation, the demand was so steep and steeper than they expected that the capacity couldn't keep up.

It's a supply and demand issue. We work with six or seven mills and a handful of distributors. If you think about all the forging production that uses SBQ bars, we're sourcing it from all the same people. We just don't have options to bring in that rawmaterial. Calle: We must look at this holistically. What's been killing the forging industry is cheap, forged products. Not cheap steel. There are no tariffs on the imported product. Our customers look at the landed costs of a Chinese forging versus sourcing locally and they see it's cheaper. They've not been supporting the North American forging companies. What's happened over the last five to 10 years is so much forging activity has moved offshore creating a mismatch between supply from the SBQ mills and demand for North American SBQ. Over the last three years, about 1.8 million tons of SBQ capacity has been shut down. So, even if tariffs were levied on finished forgings, we would have an immediate shortage of SBQ capacity. There is virtually no SBQ mill in North America that can fulfill orders for a big new program for 2022 as they’re already booked. That is a huge concern, not only for forging companies, but for our customers as well. FIA Magazine: Let’s delve into this a little bit deeper as it relates to China. Listening to what you both were saying initially, I thought the policy solution to the problem would be simply levying tariffs on finished forging products coming in from non-North American suppliers. But then you said that if tariffs are put on those products, there would not be enough SBQmaterial to keep up with the demand for your orders. Am I accurate in that assessment? Calle: 100 percent. FIA Magazine: Then if the dumping of finished forging products, particularly by China, is the problem, what is the solution? Because you can't build a mill in six months. Calle: The solution needs to look at the entire supply chain. If you put tariffs on the finished goods, it's going to lead to more forging activity and greater demand for SBQ. That should lead to more capacity investment, but that investment will only be done if there is long-term regulatory certainty. If tariffs are going to be imposed on finished forgings, they will need to be in place for the next five to 10 years. Those tariffs can't last forever, I understand that. But we need to take into account the payback period for these huge investments. We spoke with a steel mill yesterday – they made an investment of $230 million for a capacity of 250,000 tons. So that means it takes a billion dollars to add a million tons. Mills must have time to recoup that investment. FIA Magazine: The beginning premise of our conversation was to get to the bottom of how 232 was affecting the industry. But given our discussion thus far, this is clearly not a black or white issue. Take Trenton individually out of the picture. What are the practical implications of 232 tariffs as they currently stand? Should they go away completely? Would that be good, bad, mixed? Why? Lantto: The membership of FIA is so diverse. Take American Axle who has plants all over the world. They’re going to feel the tariffs in a way that we just won’t. I don't know that we could really speak for the industry as a whole because we are so diverse. But I think

FIA MAGAZINE | NOVEMBER 2021 5