The Strategist

Moody's: Cheap Russian, Chinese steel will obstruct the European market in 2017

10/26/2016 - 15:25

According to Moody's, cheap steel products from Russia and China, price volatility and rising raw material costs will preserve negative outlook for the European steel products market over the next 12-18 months. "Imbalance of global and regional supply and demand will continue to put pressure on the sector in general, and steel prices in 2017. This, in turn, will increase risk of receiving less profit", - stated the agency in a press release.

Jean-Etienne Minh-Duy Poirrier via flickr
Jean-Etienne Minh-Duy Poirrier via flickr
Experts predicted an increase in demand for steel products in Europe in 2017 by 1%. The agency expects that prices for cold rolled and hot rolled steel will remain under pressure in the next year. However, Moody's experts do not expect that prices will return to five-year lows.

In late September, Chinese steel producers Baosteel Iron and Steel and Wuhan Iron and Steel announced their merger by exchange of shares. The transaction will create a new giant Baowu Iron and Steel Group with a production capacity of 60 million tons of steel per year.

European and American metallurgists are locked in back-and-forth combat with dominance of cheap Chinese steel. In early October, 58 steel companies, including giants such as ArcelorMittal, Tata Steel, Voestalpine and UK Steel called on the European Commission to introduce custom duties.

The United Kingdom, which still remains in Europe, is particularly strongly opposed to raising tariffs on Chinese goods. Britain is traditionally supported by Nordic countries, which do not let European Commission impose high duties on Chinese goods. In September, Jean-Claude Juncker praised America, which imposed 265% tariffs on very cheap Chinese steel. According to Head of the European Commission, Europe should fight the Chinese dumping as vigorously as the United States does.

December 11, a day when China gets market economy status in the WTO, is approaching, and so need to protect European manufacturers from Chinese goods is becoming increasingly stronger. Recognition of China will mean that Europe will have difficulties in increasing current relatively modest tariffs on cheap Chinese goods. European manufacturers claim that Chinese manufacturers are supported by the government subsidies, and often sell their products even below cost.

Meanwhile, the global steel industry is recovering, according to Bloomberg. Such an optimism is explained by quarterly reports of Chinese metallurgical giants, e.g. Baoshan Iron & Steel Co., and expectation of similar rosy reports from other steel producers in Asia, Europe and the United States.

Baoshan Iron & Steel Co, which is part of Baosteel Group, is preparing to merge with Wuhan Iron & Steel Group Corp. On Monday, the company announced a net profit of 2.13 billion yuan (about 315 million US dollars) against a loss a year earlier. Sales in China increased by 34 percent immediately. By the end of 2016, Baoshan Iron & Steel Co expects 800-percent increase in net profit compared to the previous year.

Rising steel prices across Asia benefited financial profile of Japanese JFE Holdings Inc. and South Korean Posco. Both will publish their reports this week. Indian steel giants, including JSW Steel Ltd., are also expected to show better quarterly figures after considerable domestic price growth and an almost complete stop of imports.