By Timothy Aeppel

(Reuters) – Steel prices, driven to nosebleed highs by surging demand, should start to “erode” by the first part of next year as COVID-related supply bottlenecks ease and new domestic production comes online, said Mark Millett, the chief executive of the fourth-largest U.S. steelmaker, Steel Dynamics Inc.

However, the U.S.’ long-term industry health depends on the avoidance of an import surge, which has driven past boom and bust cycles for steelmakers.

“We’re starting to see inventories rebuild a little and we’re starting to see import volumes pick up a little – so it would be natural to see pricing turn over” in the first part of 2022, said Millett, who also chairs the Steel Manufacturers Association, the industry’s main trade voice in Washington.

The pandemic saw demand for many metals plunge early, but the market recovered quickly and reached new heights than anticipated. Now the focus is shifting to the Biden administration’s ambitious infrastructure plan, which would require large amounts of steel for construction projects and machinery, and create another boon for domestic producers, assuming the metal was purchased from domestic mills.

Millett said high steel prices shouldn’t hinder the government infrastructure plan. “Once an infrastructure bill passes, you don’t suddenly see trillion-dollar projects arrive on your doorstep,” he said. Instead, he predicts at least a year-long “ramp-up” period, which would allow the industry to overcome supply chain disruptions that have magnified shortages and added to pricing pressure.

Steel Dynamics (NYSE:) and United States Steel are opening new U.S. plants over the next 2 years. The market will require imports for the future, according to Millett. Millett noted that the United States used to import steel that was equivalent to 20%-22% of its domestic demand. He stated that the problem comes when imports rise beyond this.

“When it gets up to 27-28%, and when it comes flooding in, that’s when pricing gets decimated,” said Millett. “The industry can’t earn its cost of capital.”

That’s why the industry is pushing to keep trade barriers in place that have helped insulate the domestic market. The United States is currently negotiating with the European Union over limits on imports of metal from that region’s producers.

Millett said the EU hasn’t “been a major problem historically” and that he believes the administration is looking at ways to agree on some type of quota that would prevent a “surge” of imports. “As long as they fight hand-in-hand (with the U.S. industry) against the Asian, the Chinese threat, I think we can benefit,” said Millett.

According to a steel industry source, the U.S. Trade Rep and the EU are getting closer to an agreement to replace Section 232 tariffs by a tariff rate quota (TRQ), which would permit duty-free entry to a certain volume of EU-made steel. Tariffs would be applied to larger volumes.

The EU’s trade chief, Valdis Dombrovskis, has expressed https://www.reuters.com/article/usa-trade-eu-metals/eu-ready-to-look-at-north-american-style-metals-arrangement-with-u-s-trade-chief-says-idUSL1N2QU1TV openness to a quota arrangement similar those that Canada and Mexico have with the United States, but said that a deal is needed by early November. Other EU officials told Reuters that much will depend on how much steel is allowed to duty-free into U.S. ports.

According to an industry source, EU negotiators would prefer to base the contingent on U.S. import volumes before the impositions of the 2018 232 tariffs. However, the U.S. wants to base the contingent on volumes that have fallen after the tariffs were implemented. For comment, spokespersons from the USTR or the EU were not available immediately.