Protectionism could refocus the steel world on China

Protectionism has been grabbing most headlines in the steel world. And it could refocus eyes on the ferrous market's biggest driver — China.

The EU today announced tariff rate quotas on 23 types of steel in response to existing US Section 232 tariffs.

The EU safeguard is based on average import volumes over 2015-17, by product. Anything above average volumes will face a 25pc tariff. The EU imported 22.16mn t of hot-rolled wide strip in 2015-17, according to Eurofer data, which averages out at 7.38mn t/yr.

Canada is looking at ways to prevent redirected steel from the US reaching its shores. And India is looking at safeguarding measures to support its domestic steelmakers — which have been hit by slower-than-expected consumption and numerous financial issues.

The announcement of the EU measures, which were more or less in line with expectations, could spark a flurry of import activity as participants rush to beat quotas. Some Italian mills have already reduced their prices to try to prevent steel imports, despite there being no real arbitrage.

Once quotas are filled, it would stand to reason that domestic steelmakers can leverage more pricing power, as they will have a more captive market. The US has a structural requirement to import a portion of its steel needs, so it will have to continue doing this, and pay the 25pc tariff from those that are not exempt.

Tariffs into such large import hubs could lead to stronger for longer steel prices in the global marketplace.

Aside from tariffs and looking at the fundamentals, supply-side reform in China has pushed utilisation rates up to around 85pc in the past year, according to one bank, and mills are making handsome profits at current prices. Chinese exports have collapsed in recent years, from 109mn t in 2016 to around 75mn t this year, according to analysts' forecasts. This is partly down to export barriers, but also stronger domestic demand.

Far from flooding the world with cheap steel — as was definitely the case in 2015, and which has now become a regularly repeated mantra among the mainstream press — rampant Chinese steel spreads have supported global utilisation and profitability both this year and last. But production touched an official record high in May, came close to another record in June, and exports have risen for several months straight. This, combined with talk of softening GDP growth and macroeconomic jitters, could refocus all steel eyes firmly on China heading into next year.