McCloskey was on the ground with steel industry participants at the Tube and Wire Trade Fair in Dusseldorf, April 13-17, navigating the climate of uncertainty currently plaguing the European steel market.
The rules of the European steel market are being actively re-written – from the incoming intensification of the EU’s steel trade quotas (half the volume, double the duty), and the definitive stage of the Carbon Border Adjustment Mechanism (CBAM), to new lead-market stimulus for low-carbon steel products – European authorities have been playing something of a ‘catch-up’ game over the last year in proposing legislative remedies to Europe’s longstanding industrial competitiveness problem, with the steel sector a primary focus.
For some market participants, this influx of new rulemaking threatens to paralyze their trade flows, overwhelmed by cost risks on embedded carbon from CBAM – or fears that import material could be subject to doubled duties of 50% from 1 July, administered under country-specific quotas that still remain unclear. Many importers tell McCloskey that they have had to reduce or even completely cease importing activities in recent months, unable to find any worthwhile competitive advantage under current cost risks.
While CBAM costs have been a primary driver for the bullish trend in EU steel pricing since the start of this year, carbon cost risks are increasingly accepted by McCloskey’s market sources, especially due to the lack of control importers actually have in minimising their CBAM costs versus their suppliers.
Exporters attending the Tube and Wire fair were reasonably confident in their capacity to successfully verify their emissions data to facilitate CBAM declarations and payments on ‘actual’ emissions values, seeing the EU’s upcoming quota revision as a greater burden. After all, what is the point in preparing to meet the EU’s carbon compliance obligations if international material is unable to access the bloc’s single market regardless?
Indeed, McCloskey spoke to multiple exporters – particularly in Turkey – planning to sue European authorities for CBAM and safeguard cost uncertainties, perceiving quantifiable harm from punitive CBAM default values, CBAM verification uncertainties, and an anticipated lack of balance in quota restrictions per country under the upcoming replacement safeguard regime.
Trading sources told McCloskey that exporters were attempting to assess the practicality of selling to the EU under the new duty regime via strategies such as export licensing, but that without a detailed break-down of country-specific quotas – currently being prepared by the European Commission as an Implementing Act to the overcapacity framework proposal – the import of steel remains mostly unworkable where customs clearance cannot be guaranteed before July, risking the 50% out-of-quota duty rate.
While the European steel value chain is relatively unanimous in stressing the necessity of shielding EU industry from non-competitive pressures to at least some degree, red flags are becoming increasingly visible from downstream industries in warning of their inability to absorb the inflationary impact of limiting trade or climate protections to upstream products.
As such, steel trade and distribution association EUROMETAL held a press conference during the Tube and Wire fair, spearheading a new campaign calling on European authorities to extend upstream steel trade and climate protections – namely the replacement safeguards and CBAM – to downstream steel-containing derivative goods. Emphasising the urgency of derivatives protection – and supported by almost 400 signatories from across the EU’s steel value chain – EUROMETAL called for a ‘fix first, ask questions later’ approach to downstream steel protection, drawing comparisons with the agility and scope of the section 232 tariff framework in the US.
Steelmakers are supporting this push to extend trade and climate protections to derivatives, reportedly working behind the scenes at the association level to properly map the EU’s steel consumption by CN code, operating under the general assumption that they will actually need a surviving market to sell their steel to, in the longer-term.
From McCloskey’s conversations with downstream operators, such as in the automotive sector, any downstream extension would need to be exhaustive in scope, and at a significant tariff rate, as substitutive steel-containing derivative imports from China, for example, can already enter the EU at an ultra-competitive margin of around 30%.
Amid these almost impenetrable import uncertainties, one would expect steelmakers to have the run-of-the-fair in Dusseldorf, able to realise pre-fair HRC offer prices of EUR750/t delivered in deals. However, McCloskey in fact traced a decline in steel trading prices through the Tube and Wire fair, generally trading below EUR700/t ex-works, with a large volume deal agreed at the outset of the fair at 685/t effective delivered Germany (EUR660/t base ex-works) for June.
Steelmakers therefore appear willing to give discounts to fill orderbooks for the second quarter, preferring to fill rolling lines than maintain the strongest of price signals. It will be interesting to monitor steel pricing dynamics going forward as the steel market – and import lead times – approach 1 July, with domestic steelmaker pricing power constrained only by what downstream consumers can accept.
Author: Benjamin Steven and Maria Tanatar
