One of the repercussions of slowing growth is a decline in European steel consumption.
According to the European Steel Association (EUROFER), E.U. apparent steel consumption fell 3.1% on a year-over-year basis in the third quarter of 2019.
Although the decline was not as severe as the 6.7% drop in Q2 2019, concerns abound regarding European steel consumption levels.
“2019 was another challenging year for the steel sector, with declines in steel consumption and import levels which – while down compared to 2018 – were still very high compared to historical levels,” EUROFER Director General Axel Eggert said. “While some growth is expected to return to steel markets in 2020, even these modest estimations could be upended if events take an unexpected turn.”
Rising imports and steel safeguards
As it has in the past, EUROFER cited the challenge the steel sector faces from imports.
The E.U. imposed provisional steel safeguard measures in July 2018 in an effort to address rising imports levels (chiefly in an effort to combat diverted supplies on the heels of the U.S.’s Section 232 steel tariff); those measures became permanent in February 2019.
In September 2019, the E.U. announced adjustments to those safeguard measures amid criticism of their efficacy.
The changes included:
Improving the functioning of the quota for some products, including hot-rolled flat steel and steel intended for the automotive sector
Updating the list of exclusions for developing countries on the basis of more recent imports statistics
Slowing down the liberalisation of imports by reducing the pace of progressive increase of the import quotas from 5% to 3%
Nonetheless, EUROFER remains critical of the E.U.’s safeguard measures.
“As in previous quarters, developments in total imports conceal distortions at the individual product level, which are, in essence, reflecting the flaws of the current safeguard mechanism, and which have resulted in a rush to maximise quarterly quota allowances by several key exporters to the EU such as Turkey and China,” EUROFER said.
Slowing manufacturing activity
German manufacturing activity continues to languish in negative territory, but there are glimmers of a potential recovery.
According to IHS Markit’s most recent Germany PMI, the Flash Germany Manufacturing PMI reached an 11-month high of 45.2 in December, with the rate of manufacturing decline receding for the third time in four months.
The bad news, however, is that those PMI readings still reflect a contraction in manufacturing activity.
“A number of positive takeaways from January’s flash PMI survey suggest the storm clouds over the German economy may be starting to clear,” said Phil Smith, IHS Markit’s principal economist. “The drag from the downturn in manufacturing continues to ease as the sector moves closer to stabilisation, while the services economy is back growing at a robust pace.”
With that said, EUROFER does not see a significant manufacturing rebound in the near future.
“The current downturn of the manufacturing sector in the EU is not likely to bottom out in the very short-term,” EUROFER said. “Major risk factors are escalating trade wars between the US and several of its main trading partners (mostly China, despite the trade agreement signed on 15 January 2020 that has eased frictions) and persistent uncertainty regarding the final Brexit deal to be agreed by the end of 2020. These factors are set to weigh on trade conditions during 2020, and may even lead to a further deterioration in business sentiment and seriously hamper investment growth.”
Tensions ahead lead to dreary outlook
Despite the recent signing of a phase one trade deal between the U.S. and China, thus temporarily halting an escalation of trade tensions between the world’s top two economies, EUROFER remains bullish about a number of factors that could negatively impact the E.U. steel-producing and steel-using sectors.
“However, the EU’s manufacturing sector is still undergoing a serious downturn, given its large exposure to global trade,” EUROFER added. “A no-deal Brexit by the end of 2020 – which is theoretically still possible – and a new escalation in protectionist trade measures, coupled with possible geopolitical tensions in the Middle East (Iran, Iraq, Libya) would further contribute to curbing business confidence and activity in steel-using industries.”
The U.K. officially executed its withdrawal from the E.U. on Friday, ending 47 years of membership in the trade bloc. Now, the U.K. and E.U. will begin another round of negotiations, this time on formulating a new trade arrangement in a post-Brexit world. For now, the U.K. will enter a transitional period through the end of 2020, with the aim of striking a new trade arrangement by the end of the year.
As such, there will likely be many more twists and turns in the U.K.-E.U. saga this year, albeit on a more nuanced level than the overarching Brexit drama provided: instead of a question of E.U. membership and identity, the parties will hash out the nuances of trade.
It remains to be seen how the situation will play out, not to mention the aforementioned geopolitical tensions in the Middle East.
For now, given the sheer volume of challenges and uncertainties faced, there is more pessimism than optimism regarding the health of the European steel sector in the year ahead.