For shipowners, it seems like there is always something to worry about. In recent months, the state of the global economy was the primary concern, but we now are seeing a number of signs that point to an improvement in both the U.S. and the European economies.

The latest cause for concern is President Bush's decision to impose high tariffs on certain steel imports into the U.S. for the next three years. While the specific details are a bit complicated, the upshot is that many countries will face tariffs of up to 30% in the first year, 24% in the second year, and 18% in the third year. But some important suppliers to the U.S., including Canada and Mexico, are exempt from the proposed tariffs.

Because it could affect global steel production, which is responsible for roughly 50% of dry bulk trade demand, this issue is potentially very important to dry bulk shipowners. However, we expect these tariffs to play a relatively small role in the market over the remainder of 2002 and beyond.

First of all, U.S. steel imports have already fallen quite steeply over the past few years, from more than 40 million tonnes in 1998 to about 30 million tonnes in 2001. Although these imports represented 14% of the trade in finished steel products, they amounted to less than 4% of worldwide steel production, and to less than 2% of dry bulk trade demand.

Second, the imports from the countries most affected are even smaller than these amounts indicate. European steel shipments to the U.S. totaled just over 6 million tonnes last year, while Japan and Korea each exported about 2 million tonnes to the U.S. In contrast, supplies from Canada and Mexico together totaled nearly 8 million tonnes.

Furthermore, it is no sure thing that these tariffs will hold up in court. The Europeans are expected to challenge the tariffs in the World Trade Organization, where similar tariffs have been overturned in the past.

Some estimates point to a drop in U.S. imports of 5-7 million tonnes over the next year if these tariffs are implemented. Although we believe this is on the high side, it is certainly within the range of possibility. Given such a scenario, we believe that most of the negative impact on the dry bulk market would come from reduced European shipments to the U.S., which would be accompanied by lower European steel production.

Accordingly, Cape rates would fall by nearly $1,000 per day relative to where they would be in the absence of such tariffs. Panamax and Handymax rates would fall by an estimated $500 per day compared to our pre-tariff expectations.

However, we believe that such a reduction in trade is only likely to last for a few months, before other factors serve to offset this decline. Most likely, a recovering U.S. economy will lead to increased demand for steel products, and this will probably lead to higher imports during the second half of the year, even if the tariffs are upheld by the WTO.

Of course, much of the uncertainty surrounding these tariffs stems from the fear that they could lead to a more widespread trade war. Although it is possible that larger disruptions in the steel trade could take place, or that retaliatory measures could be taken against U.S. agricultural exports, we believe that such developments are highly unlikely to occur.

The chart above shows our updated short-term forecast of Cape spot earnings, which has been revised down modestly to account for the impact of these tariffs over the next 6-9 months. We will address this issue again in our March Dry Bulk Market Brief, which should be available at the end of the month.

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