Planned economy and world market pressure: outlook for the steel year 2019

Over long stretches of 2018, global steel prices were able to maintain the high level previously reached. It was not until the final quarter that a clear weakening could be observed. Will the downturn continue in the new year or will there be a countermove? Now that the final "safeguard measures" of the EU that will come into force in February have been announced, the outlook for the new year is clearer. Although the safeguards bring elements of a planned economy into the EU steel market, they are not a "worst case" for steel processors. Competition on the world market will be more intense than in previous years. Accordingly, prices will tend to be under pressure. On the EU steel market, the demand dynamics of previous years will not continue. In terms of earnings, there is more downward than upward potential for steel prices in 2019, even if fluctuations in both directions remain possible.

A trump tweet, tropical hurricanes, the Brexit, trade conflicts,  actions of the Chinese government - these are just a few of the factors that can lead to new evaluations and that steel market participants must therefore keep an eye on. Nevertheless, I venture to take a look this year as well. In my view, the following three influences will be the most important for steel prices in 2019:

1.) world market: Boom coming to an end

Somewhat later than I expected, the boom in the global steel market, characterized by high steel prices and record profits , now seems to be coming to an end.

The most important factor here is the market in China, which is losing support. The reduction in capacity in 2017/2018, combined with growing demand, led to high prices on the domestic and export markets. However, prices have fallen sharply in recent months. There are some indications that the structural overcapacity will be more noticeable again this year. Chinese exports will stabilize in 2019 or even rise again. Political influences in China can hardly be predicted and it cannot be ruled out - especially for the coming months - that prices will rise again to some extent. But it is unlikely that prices on the domestic and export markets will once again reach the record levels of the past two years.

In addition, trouble spots have arisen in other parts of the world market which are highly unlikely to dissolve so quickly in their entirety. Turkey in particular should be mentioned, but also the weak growth in demand in other important export countries such as South Korea or Russia. Added to this is the weakness of the automotive industry in various countries and the fact that more and more efficient steel producers are active on the world market.

Despite all protectionism, the resulting price pressure will be stronger than in previous years and will be felt across countries.

2.)  EU safeguard measures: No "worst case" for steel processors

This also applies to the EU, and it applies despite the so-called "safeguard measures". Now that experience has been gained with the provisional measures in force since July 2018 and the final measures to be implemented from February 2019 are largely clear, an initial assessment can be made.

My basic assessment has not changed: The application of the "safeguard measures", which can be sold well politically as a defence instrument against the unjustified US import duties, is not justified in the breadth of the steel products concerned. For many of the product categories in question simply do not meet the criteria laid down by the World Trade Organization (WTO). In addition, some components obviously have nothing to do with protection against trade diversion, but serve solely to protect the EU steel industry from unwelcome international competition. Or why else does the EU Commission distribute imports "evenly" over the year by means of quarterly quotas? Why else are parts of the import quotas allocated to individual countries of origin?

On the other hand, the Commission could not ignore the loud protests of many steel processors. With their submissions, they have succeeded in ensuring that the existing anti-dumping measures are taken into account in the country allocation and that the quotas are increased by 5% annually. This takes some of the edge off the safeguards.

As of February, a complicated overall package will apply, which will significantly increase the bureaucratic burden associated with imports from third countries. Steel traders and steel buyers are brooding over what rule now applies to import X from country Y, which duty-free quota will be free or full at what point in time and how best to arm oneself against having to pay an import duty of 25%. The "protective measures" will tie up resources unnecessarily along the supply chain and cause trouble. Flexible use of market opportunities? Nothing to report. Adé market economy, welcome planned economy!

But how is the market effect to be assessed beyond that? The provisional measures may have dampened the incoming price influences of the world market, but they did not stop them. Despite all the uncertainties, there is much to suggest that this will remain so. In the case of some products such as wire rod, bar steel or galvanized sheet, the duty-free quotas may be too tight and make supply more difficult. As with many other products, however, the impact on hot-rolled wide strip, the most important imported product, is likely to be limited. On the whole, a tendency towards a price-increasing effect cannot be ruled out. However, it looks as if the worst-case scenario feared by processors in the form of general supply bottlenecks with massively higher prices will not occur.

3.)  demand momentum weakens

The prospects on the demand side are also too weak for this. The series of negative economic reports from industry sources underlines the expectation that the strong demand dynamics of recent years will not continue on the EU steel market. It remains unclear when and to what extent the automotive industry will be able to overcome its weak phase. Although demand could pick up again in the coming weeks, it will probably no longer match the growth rates of previous years. Support for steel orders from positive stock cycle influences, which can often be observed in the first half of the year, is likely to remain limited this year because  of the many political and economical uncertainties and the often still high inventories.

Stabilization of steel demand at the good level achieved is the most likely scenario. It remains to be seen whether the demand growth of approx. 1% forecast for 2019 by the European steel association Eurofer at the beginning of November in a then even better economic environment can be achieved .

The interplay of these influences will result in more downward than upward potential for steel prices in Germany in 2019. There are, however, differences in the individual segments of the steel market that need to be analyzed in detail.

The article was written by Andreas Schneider, StahlmarktConsult, steel market consultant from Leverkusen.

Photo: StahlmarktConsult

The guest commentary reflects the opinion of the author, not necessarily that of marketSTEEL's editorial staff.