European steelmakers are critical of administrative elements of the EU’s tariff-rate quota (TRQ) system in its post-July rework, sources tell Dow Jones Energy, specifically the pro-rate allocation of duties on first-come-first-served clearances.
The EU intensified its steel protection framework earlier this year, in July, with the market now in its second trading quarter following implementation.
Having had time to digest new complexities introduced by the EU’s new steel regulation – which intensified steel trade protections by approximately halving duty-free volumes, and doubling out-of-quota duties to 50% – steelmakers increasingly view aspects of the new system as open for exploitation, particularly interactions between first-come-first-served duty allocations, and what that means for effective duties if initial clearances exceed allocated volumes.
The EU’s TRQs open at the start of each trading quarter, with the exception of clearances in the inaugural July-Sept quarter, subject to an 11-day acclimatization blocking period, and competitive shared quotas, which are only available once an origin exhausts its dedicated country-specific volume. Importers with volumes in-port will generally seek to clear goods as soon as possible to ensure they can secure their part of available duty-free volume allowances, and avoid 50% duties.
However, due to immediate importer competition for these duty-free volumes, and customs fragmentation across the EU’s 27 member states, the EU’s ‘first-come-first-served’ principle for quota allocations treats all first-day clearances into the steel quotas equally, diluting the duty cost across all relevant volumes. Effectively, this means that excess volumes can clear into the new steel quotas without paying the full 50% duty, instead issuing duties pro-rata across the entire volume.
This does of course mean that no volumes clear entirely duty free, but pro-rata mitigation of the full 50% duty cost could still allow more import volumes to enter the EU market than intended by the tightened quotas, at cost levels below the competition line for domestic producers.
Dilution in practice – product category 24
Consider, for example, recent quota dynamics under product category 24, ‘Other Seamless Tubes’, which allocates an annual duty-free quota allowance of 52,635.36 t for Chinese origin imports – or 13,158.84 t quarterly.
Market participants report that a significant volume of Chinese tube imports were cleared for distribution into the EU since the opening of the Q4 quota period from October, resulting in a pro-rata dilution of the 50% duty across all cleared volumes.
Indeed, checking the EU’s online quota tracker through TARIC shows that China’s category 24 quota is fully exhausted, and that the last in-scope volumes (dated 8 October) received 0% allocation to the quota, signalling at least some out-of-quota imports subject to the full 50% duty rate.
Here, however, friction is encountered with the EU’s quota data framework: the ‘effective’ duty paid can be calculated, or inferred across first clearances in reference to data on the ‘Total awaiting allocation’, and the ‘Allocated percentage at the last allocation’ – but this data is only ever available in reference to the most recent import registration, and is not stored anywhere within the EU’s customs databases.
Essentially, this means that if TARIC data is not constantly scraped and stored, market participants lose visibility of not only volumes potentially cleared in excess of the EU’s desired limits, but also the effective duty rate paid on that material.
Fortunately in this case ESTA – the European Steel Tube Association – circulates weekly quota utilization reports for product category 24, including latest data for ‘Total awaiting allocation’. ESTA’s report from 2 October shows China’s product category 24 at its initial balance of 13,159t – but importantly, lists 23,948t as awaiting allocation, almost double the EU’s designated allowance.
Unfortunately, ESTA’s data does not include allocated percentages on last allocation such to fully confirm whether duty dilution occurred, as opposed to withdrawal of the import registration (possible in some jurisdictions, like Italy), but cost analysis strongly suggests an advantage to clearing the material.
At an initial balance of 13,159t, clearing an initial volume of 23,948t would instantly exhaust the quotas, meaning 50% duties should be applied on 10,789t. As EU customs processes – across all its Member States – are not equipped to fairly distribute first-come-first-served allocations from this first-day volume, the 50% duty is instead imposed pro-rata across the entire 23,948t, resulting in an effective duty rate of 22.53%.
Landed costs
Market participants surveyed by Dow Jones Energy reported an import offer ex-China at EUR568/t FCA – EUR768/t CIF when including shipping costs – which when applying a pro-rata duty of 22.53%, and Carbon Border Adjustment Mechanism (CBAM) costs, gives a landed value of EUR1,071/t. The offer reported includes a CBAM cost assessment of EUR130/t – in line with costs generated by Dow Jones Energy’s CBAM Default Values Calculator.
EU suppliers reported a general domestic offer price level of Eur1,350/t for equivalent goods, meaning that even within the EU’s intensified steel protection framework, and assessed on CBAM default values, imports can hit the bloc almost Eur300/t below domestic offers. In fact, even applying a 50% duty to the CIF price gives a cost almost Eur100/t below domestic price indications, suggesting that – at least in product category 24 – the EU’s new protections are not fully effective in protecting steelmakers on volume, or price.
Steelmakers argue that where significant duty rates are required to close these cost gaps – often the case with ex-China imports – that this dynamic could in fact incentivize, rather than deter, low-cost exports to the EU beyond defined quota allowances.
Trader sources confirm the opaqueness surrounding pro-rata duties and totals awaiting allocation in the EU’s TARIC databasing once clearances are registered beyond initial imports, confusing their estimations of import accessibility:
“The EU doesn’t leave the number online, so we don’t even know what’s waiting – what’s been allocated or retracted,” said one trader. “It’s very difficult to estimate.”
Importers still consider the current pro-rata system as the best option however, given practical issues in tracking first-come-first-served allocations across the EU’s fragmented customs regime, arguing that having to pay the full duty wouldn’t make sense where quota volumes were visibly open at the time of requested clearance.
Market participants say that this interaction between first-come-first-served quota administration and duty dilutions is a long-standing issue that was also present under the pre-July steel safeguard system, but that market impacts were historically limited to flat steel imports. Now that overall steel quota volumes are reduced, however, duty dilutions are seen as presenting a threat in new product categories. This is obviously something steelmakers would like to remedy under the new system, especially if the new TRQs are to be a permanent feature of the EU’s future steel trade landscape.
Author: Benjamin Steven
