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EU Quotas Will Have Limited Impact on EMEA Steelmakers

The EU finalised safeguard measures for steel imports introduced on 2 February will have no material impact on rated steelmakers in EMEA, Fitch Ratings and CRU say. The measures, structured as quotas and tariffs, are marginally supportive for domestic EU steel producers and foreign companies with rolling capacities in the bloc as they could support steel prices in the region. Competition in other markets could intensify if volumes are diverted to countries with lower import barriers.
The finalised safeguard measures are largely a continuation of preliminary measures that have been in force since July 2018 and were implemented to avoid diversion of trade flows into the EU following the introduction of steel import tariffs in the US. The measures are structured as quotas based on the average volumes of steel imports during 2015-2017 plus 5%. A 25% tariff will be applied to imports above the quotas. The quotas will be increased by 5% after six months and then by the same percentage every year. They will remain in place until 30 June 2021.
The quota for hot-rolled coil (HRC) is global. The quotas for other product categories are based on a country of origin with a specific volume set for each country that contributes at least 5% to import product volume, while other countries fall into a residual category. Imports accounted for 21% of flat products, 14% of long products and 26% of tubes in the EU steel market in the twelve months to end-1H18. Semi-finished products, such as pig iron, slabs and billets, are not subject to quotas, as the EU is structurally short of these products.
We do not expect any significant impact on rated EMEA steelmakers because the measures are designed to largely preserve the status quo and allow total import flows to continue into the EU. Still, the quota amounts look low in some categories compared with the most recent import run rate. This could be explained by higher-than-usual imports in 2018 due to front-loading ahead of the safeguard measures, but changes in demand and production patterns could also contribute to the gap.
The safeguard system is marginally positive for EU-based steel producers, including the largest European steel producer ArcelorMittal, since the measures should support steel prices and smooth out import inflows. Companies with rolling facilities in the EU could also benefit. For example, NLMK has own rolling assets in Denmark and access to assets in Belgium through a joint venture, producing HRC, cold-rolled coil (CRC), plates and other products. The company exported about 7.5 million tonnes of pig iron and slabs from Russia with over 40% of these volumes sold to the captive rolling assets. These rolling assets allow NLMK to avoid trade restrictions.
Russia-based producers were subject to differential duties on HRC and CRC imports over 2016-2017, which has already shaped the structure of imports from this country. Severstal exports about 1 million tonnes of HRC (under 10% of its total steel products output) and only pays about 5% as anti-dumping duty. Since HRC imports are now subject to the global quota, there could be increased competition with other countries, such as Turkey. For MMK, duties have made exports to the EU economically inefficient. However, the company has already been more focused on its domestic market and the Middle East.
ChelPipe mainly exported large diameter pipes for the Nord Stream 2 Project over the past two years. These volumes peaked last year with only minor volumes expected this year, which are likely to fit into quotas. Other ChelPipe exports to Europe are negligible.
The measures could have some indirect impact on the domestic Russian market or other less protected markets due to intensified competition as sales could be directed to these markets. This could lead to an increased pressure on steel prices. Steel prices in the CIS have fallen from last year’s peaks in May, towards 2017 levels.
Source: Fitch Ratings
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