More trade protection on the way in Europe?

After having gone after imports of both hot-rolled coil (HRC) and cold-rolled coil (CRC) this year, will the European Commission soon be turning its attention to imports of galvanized steel? (primarily hot-dipped galvanized material (HDG))

In all likelihood yes but just how effective would any import restrictions be?

Let’s take a look at the case for implementing trade protection measures on these products and what effect they may have.

Ever since Metal Bulletin’s recent galvanized steel conference in Bratislava, talk of a request being put from European steelmakers to the European Commission to investigate HDG imports has grown.

A look at the data would appear to support the steelmakers’ case.

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EU imports of HDG increased by around 80% during the first half of 2016, when compared to the same period last year. As the chart shows, the vast majority of this increase can be attributed to an increase in arrivals from China.

If only Europe’s coated steelmakers enjoyed trade protections, prices would surely head up appears to be the belief.

On this argument, however, the evidence is mixed.

Certainly prices on most flat-rolled steel products in Europe have increased in recent months. And this follows the implementation of definitive anti-dumping measures on imports of CRC from China and Russia back in July, as well as the imposition of preliminary anti-dumping measures on imports of HRC from China earlier this month.

So prices are finally rising after the implementation of trade protection it would seem.

But looking at the data, there does not appear to be a quick and easy link between import volumes and local prices.

In the case of CRC for instance, imports into the EU have actually been falling throughout 2016.

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With the European Commission taking the step of registering imports of CRC from China and Russia since December 2015, and with preliminary anti-dumping duties imposed back in February of this year, EU imports of CRC from China and Russia during the first half of 2016 were down by 88% and 68% respectively, when compared with the same time period in 2015.

Yet it is only now that CRC prices are increasing.

If prices were increasing because of changing trade flows, one would expect CRC prices to be performing better than HDG and HRC prices in the EU. But they are not.

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And of course there remains the fact that imports of both HDG and HRC have been higher during the first half of this year when compared to H1 2015. And yet their price performance mirrors that of CRC.

Of greater importance is the fact that steel prices in China are rising sharply at the moment on the back of rising primary raw material costs, notably coking coal. Import competition has been reduced in the EU but not really because of trade protection measures.

So does this mean that such trade measures are ineffectual when it comes to increasing prices?

Not necessarily, but existing measures in the EU should be seen as just a start if the final objective is to increase local prices in a sustained and significant manner. Protectionism does tend to lead to higher prices but only when implemented effectively.

The USA offers a good example of this, with the country far outperforming the EU when it comes to protectionism.

US trade investigations in recent years have been much wider in scope (i.e. targeting a wider range of countries) and much more severe in their outcomes (i.e. much higher anti-dumping margins).

US steelmakers have enjoyed higher steel prices through much of the past year, partly as a result of the greater protectionist measures in force there.

For example, US anti-dumping duties on Chinese CRC are now set at some 266%; those in the EU are at 20-22%.

This effectively sets a much lower price ceiling in the EU – even with the trade duty applied, Chinese export prices of CRC remain below domestic prices in the EU. It is only the inclusion of shipping costs to the EU that would see them rise toward equivalent European prices.

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Meanwhile, US anti-dumping measures against CRC imports apply to eight countries; those in the EU against just China and Russia.

Thus recent precedent shows that even if the EU were to investigate HDG imports, it is likely that the investigation would focus solely on China. Precedent also shows that there would be no guarantee that any duties imposed would be high enough to halt the flow of material.

Previously-imposed duties in the EU on stainless steel imports from Taiwan for instance have not been large enough to stop perceived dumping of material, with the European Commission now in the process of reviewing the anti-dumping duties imposed back in 2015.

The European Commission is also attempting to toughen up its anti-dumping regulations and methodology although this does bring to mind the phrase “locking the stable door after the horse has bolted”.

There are limits to how far protectionism can help in any case.

In the case of the EU, one must also consider the other side of the ledger i.e. exports. EU exports of HDG are more-or-less static this year when compared to 2015 and, with further HDG capacity expansions taking place in Russia and Turkey (of particular importance to European exporters), it is likely that European steelmakers will increasingly struggle to expand their export sales.

Recent and ongoing trade investigations on coated steels by the likes of Egypt, India, and Vietnam may also come to limit European export sales.

Taking everything into account, it is more likely that EU exports of HDG will diminish in the coming years, resulting in extra material looking for a home within the EU.

And then we must consider that ample spare capacity remains within the EU as well.

Should prices increase, producers would be very likely to ramp up output again. Indeed this is already happening in the HDG market, with ThyssenKrupp in the process of bringing its Galmed facility in Spain back on stream and Tata Steel announcing new investments at its Shotton facility in Wales.

Europe’s steelmakers should thus enjoy their recent price increases but, in our opinion, they have been more a result of reduced import competition through rising Chinese prices than reduced import competition as a result of trade measures.

Furthermore, existing trade protection measures in the EU are unlikely to lead to a sustained and significant increase in European steel prices, as has happened in the USA this year.

The ongoing talks surrounding potential further consolidation of steelmaking within Europe i.e. tie-ups between Tata Steel and ThyssenKrupp, and ArcelorMittal and Ilva, would probably deliver greater pricing power to producers. But that is a topic for another article.

Sources: BBCEl PaísEuropean Commission, FTMetal Bulletin, USITC

This article was also published for Metal Bulletin in October 2016

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