EU Steel Buyers Grapple with Safeguard Implications

The provisional import quota system is designed to restrict the impact of steel being diverted into the EU market as a result of the Section 232 measures, introduced in the United States. Any steel brought into the European region, over and above specified tonnages, will incur a 25 percent tariff rate. The European Commission believes that this will protect the local steel industry from serious harm. The quotas are set for a period of 200 days from July 19 and have been calculated, on a pro-rata basis, from the average of the tonnages imported in the years 2015, 2016 and 2017.

The European Commission has excluded five steel categories from the provisional quotas and tariffs – stainless steel quarto plate, grain oriented electrical steel, non-alloy and other alloy cold finished bars, railway material and other seamless tubes. However, these products may be included when the definitive measures are decided. The Commission will continue to monitor the import volumes for these products. Conclusive measures are likely to be determined in December 2018 and will supersede the July announcement. A number of exclusions have been made for the 122 developing nations, albeit with exceptions for some steel categories in each country. These were determined if their previous import volumes exceeded 3 percent of total imports for each specified product.

MEPS notes uncertainty surrounding how the quotas will operate. Many buyers worry about whether foreign steel, ordered now, will be subject to the 25 percent tariff when the material is delivered to the port. A customer will not know if the quota will still be available, at the time of ordering the material. 

An electronic monitoring system will be used to manage the quotas. The allocation will be made on the second working day following customs acceptance, in chronological order of the date of customs declaration. Consequently, material booked from overseas cannot be guaranteed to be tariff free until after it has arrived, been accepted at customs and allocated, under the relevant quota, by the Commission.

Concerns are being raised that exports from the EU to the US would reduce, because of the Section 232 tariffs, resulting in material being diverted back into the European market. However, this has yet to be realised. The large disparity between US and EU steel prices, at present, enables steel to continue to be sold into the United States, with the tariffs included. MEPS is forecasting a downward domestic price correction, in the US, in the autumn of this year. Despite this, exports, to the country, are likely to remain viable, in the near term, particularly for flat steel products.

Imports of steel into the EU were rising prior to the Section 232 announcements. It is feasible to conclude that volumes from third country sources would have continued to increase, with or without the US trade barriers. The European Commission’s safeguarding measures are expected to bring this growth in foreign material to a halt and could result in a reduction in imports, as European traders reduce purchases, for fear of falling foul of the tariffs by the time the steel arrives. This may restrict the buying options available in the market and give local producers increased pricing power.

European steel price increases are now forecast to extend into the autumn, with the MEPS EU average hot rolled coil transaction value likely to hit an almost seven-and-a-half-year high, in the coming months. Consequently, profits at the domestic steelmakers are expected to remain healthy, for the remainder of this year. 

The upward price effects of the EU safeguarding actions are likely to be limited. The quotas are not designed to reduce foreign supplies but to restrict excessive growth in steel imports, which may result from the redirection of material due to the US Section 232 tariffs. Overseas material is an important source of supply for the EU market.

A degree of competition from third country suppliers will remain in the EU steel market. This may be tempered by tariff concerns. Nevertheless, if domestic mills were to push too hard for price increases, then imports, including any tariff costs, would become attractive to many EU buyers. The result of this would be a loss of market share for the local producers. 

European domestic steel prices are forecast to weaken, marginally, towards the end of 2018. A negative trend in transaction values is anticipated throughout most of 2019. Declining raw material costs, coupled with reduced home and overseas demand, is predicted, next year. Nevertheless, a modest pickup in steel selling figures is possible, in the first quarter of 2019.