European Steel Squeezed Between Rising Import Pressure, Depressed Home Market

“The impact of imports having surged over 2018 has squarely hit home. In an EU market that grew by 3.3 percent last year, imports grew by 12.6 percent and domestic deliveries by only 1.7 percent,” said Axel Eggert, EUROFER Director General. “This represents yet further loss of market share for domestic producers.”

The “relaxation” of the final steel safeguard measures—with an enlargement of 5 percent in February this year with another upwards revision of 5 percent scheduled for July 2019 and another in July 2020—operates out of step with the anticipated decline of the EU steel market in 2019. As such, the 15 percent increase in import quota allowed in the final safeguard measures risks squeezing the EU steel sector, as it will be exposed to rising import pressure in a shrinking market.

“As apparent steel consumption is expected to fall by 0.4 percent in 2019, the situation for domestic producers will worsen,” emphasized Eggert.

EUROFER’S Steel Market Overview

In the final quarter of 2018, domestic deliveries from EU mills to the EU market decreased by 2.1 percent compared with the same period of 2017. This was the result of third country imports growing by 16.3 percent year-on-year within a context of flattening steel demand growth over that timeframe. Imports amounted to 9.6 million metric tons and accounted for 24.7 percent of EU steel demand.

Over the whole year, 2018 apparent steel consumption rose by 3.3 percent. Third country imports grew by 12.6 percent, which contrasts sharply with a 1.7 percent rise in domestic deliveries. The preliminary safeguard measures imposed by the EU Commission in July 2018 were supportive to limiting import volumes in the second half of the year compared with the extraordinary high import volumes that landed in the EU in the first half. However, the sharp year-on-year rise in the second half of the year also illustrates that the threat of deflection of tonnage due to the Section 232 tariffs on steel imports imposed by the U.S. and market distortions due to the global overcapacity and other countries’ protectionist measures is still very much alive.

The outlook for EU steel demand is subdued. The base case scenario for the development of final steel use shows only marginal growth in 2019 and 2020. Given the uncertainty that currently surrounds the EU steel market in terms of demand and supply fundamentals, steel inventories will be managed with care. With reportedly relatively high inventories in the steel distribution chain at the start of 2019, apparent steel consumption is forecast to fall by 0.4 percent over the whole year 2019. Apparent steel consumption may grow by 1.3 percent in 2020.

With only a few months of customs data available, it is impossible to see a clear pattern yet in trade flows. Nevertheless, with imports remaining at elevated levels and exports on a downward trend in early 2019, the justified conclusion seems to be that there is no evidence of an easing in competitive pressures in international steel markets. With global steel overcapacity still estimated to be 550 million metric tons by the OECD, it is of the utmost importance that individual countries and regions dismantle market-distorting subsidies and other government support measures. Additionally, they must share data and information on the process of capacity reduction in order to facilitate the process of cutting excess capacity where it is needed most and avoid a further proliferation of trade distortions.

EU Steel-Using Sectors

Total production growth in EU steel-using sectors cooled further in the fourth quarter of 2018. The strongest slowdown was registered in the automotive sector, followed by the mechanical engineering sector, the steel tube industry and the metal goods industry. Meanwhile, production activity in the construction sector did not witness much of a growth deceleration, but continued to expand at a healthy pace.

Prospects for production activity in EU steel-using sectors in 2019 and 2020 are rather weak, with external and internal headwinds undermining the outlook. While private consumption and government expenditure will continue to grow, both exports and investment are at risk of falling behind expectations in case of a hard Brexit and an escalation in global protectionist measures. The significant degree of uncertainty the corporate sector is facing clearly has the potential to lead to a negative confidence shock and investment decisions being postponed until more clarity emerges on trade conditions and Brexit. On the other hand, a well-managed Brexit and settlement of U.S.-EU trade disputes would pose an upside risk.

Output in the EU’s steel-using sectors is forecast to grow by 0.9 percent in 2019 and by 1.1 percent in 2020.

EU Economic Context

Slowing global economic momentum and the related deteriorating contribution from net trade has been the primary reason for the weakening of the EU economy in 2018. The slowdown was led by the industrial sector, bearing the brunt of global headwinds. Export orders gradually weakened, dragging on confidence.

Available forward-looking indicators and hard data seem to justify the conclusion that the weakness in industry will at least persist over the first half of 2019. The base-case scenario for economic growth in the EU suggests that—nevertheless fairly solid—domestic economic fundamentals could offset the weakness in trade. However, investment is particularly at risk of falling behind expectations if rising protectionism and a worsening global economic environment lead to a further deterioration in business confidence.

EUROFER’s second quarter 2019 forecast for EU GDP growth is 1.5 percent in both 2019 and 2020.