January 2018 HY Corporate Credit HY Multi Sector.Media. Cable & Satellite Efforts Employed to Avoid Tariffs: Transshipments & Mislabeled Goods An unfortunate consequence of globalization, the North American steel market has evolved into an attractive target for foreign steelmakers to arbitrage steel prices by selling their products abroad rather than at home. Figure 29 displays the seven largest steel exporters to the U.S. This phenomenon is driven by disparities in regional steel prices around the world. For example, a Chinese steel company may determine it can earn a higher profit by shipping steel to NA and realizing higher selling prices rather than selling that steel into the Chinese market at lower price points. Hence it is important to keep an eye on the gap between U.S. domestic and Chinese export prices in order to recognize when an arbitrage opportunity may be presenting itself to foreign steelmakers, as shown in Figure 30 below. [Figure 29: Significant steel exporters to the U.S. market 2.5 2001 ! 1fIt11101 ,11 ill,1111 ti 6. g ug oomm lo e a 22 -3 02 , 22 -1 roz , 22 -•Az • CANADA oBRAZIL • KOREA • MEOCO WRMKEY • RUSSIA a JAPAN SCarre DaRiCAt &Mt VS OsplenThYr of Convnew Figure 30: Spread between U.S. and Chinese HRC prices 5350 - 5300 5250 5200 $150 $100 5119 550 50 IA IA LA Let tn m ID b Co QD 0 N N N N N N aei .6 4zdt e.4“,... e“ .4) O Li. Lai -, cit %.• Q 6 60 OD o US HRC vs China HRC Spread (5/st) Swee Dovut &At SAANNA2 fl_I t lfr While the U.S. has implemented preventative tariffs to discourage substantial amounts of foreign steel from entering the country, we believe this has only partially alleviated the burden of imports as many foreign manufacturers are well aware of ways to circumvent these duties. In one instance, a foreign manufacturer may ship steel destined for the U.S. through a nation that is not subject to tariffs before eventually sending it to its U.S. desti