The Section 232 tariffs implemented in the United States in 2018 led to a sharp increase in domestic steel prices, driving the hot-rolled coil index to a nearly 10-year peak in July. But how did the tariffs impact the rest of the global supply chain? Fastmarkets' regional experts gave us answers.
China
China has exported less hot-rolled coil since the Section 232 tariffs took effect, but soft domestic demand and prices have pushed some tonnages abroad since late October. The HRC price in eastern China began trending downward in mid-September, and plunged to a year-to-date low of 3,570-3,590 yuan ($514-517) per tonne on November 27, according to Fastmarkets assessments.
Over the year, the country's HRC exporters have lamented weak demand, especially in southeast Asia, but some mills and traders have enjoyed more active market conditions since late October due to weaker domestic prices. Meanwhile, some other regions such as South Korea and South America helped to boost China's HRC demand.
Vietnam, one of the largest users of Chinese HRC, has been prevented from selling cold-rolled and hot-dipped galvanized coil processed from Chinese substrate to the US due to a duty circumvention probe. That hurt China's HRC exports to Vietnam, although more significant factors included lower bidding prices from producers there and competition from other regions such as Turkey and Ukraine.
China is said to be suffering minimal negative impact from the Section 232 tariffs because the US has been dampening China's steel exports for decades. And less than 10% of China's steel was used abroad over the past few years. However, the ongoing trade war has hindered steel demand growth globally, which indirectly led to reduced demand for Chinese goods, sources told Fastmarkets.
China exported 63.78 million tonnes of finished steel in the first 11 months of 2018, down 8.6% compared with the same period of 2017, according to the General Administration of Customs.
Qiu Yuecheng, director of metal research at Everbright Futures, said the trade war has hurt investor confidence, which led to falling investment and demand in the steel industry. Despite the year-on-year drop on export volumes, the export market has been more active recently and could also bolster China's steel use next year amid soft domestic demand.
Xin Guobin, the vice minister of China's Ministry of Industry & Information Technology, said that slow growth in the country's automobile industry would be the "new normal" over the next two years - casting a dim outlook on HRC's downstream demand. China's exporters had been cutting prices between late October and early December in order to secure more deals abroad, which helped them improve profits amid declining revenue domestically.
Europe
While the Section 232 tariffs did not have a direct impact on the European steel market, the European Commission (EC) in late March launched a safeguard case into 26 steel product types to prevent import volumes being redirected from the US to Europe. European buyers were concerned that the measures would not allow consumers to import required volumes, but after the EC set preliminary measures it became evident that European coil buyers did not use their full quota volumes.
The EC imposed preliminary measures in its safeguard case on July 18, in the form of tariff rate quotas on 23 steel product categories, based on average import volumes over the past three years. Under those measures, which can remain in place for a maximum of 200 days, imports face a 25% tariff if the quota is exceeded.
The implementation of provisional measures did not support domestic prices in Europe, which instead fell on declining import prices - particularly from Turkish mills - and slow trading. Turkey has been offering more HRC to the EU, mainly Southern Europe, as that region is traditionally more dependent on imported coil and Turkey is largely blocked from exporting to the US due to higher 232 duties.
Fastmarkets' weekly price assessment for domestic HRC in northern Europe was ?520-530 ($593-6059) per tonne ex-works on December 26, down by 7.5% since the beginning of the fourth quarter. Fastmarkets' weekly price assessment for domestic HRC in southern Europe was ?470-500 ($536-570) per tonne ex-works on December 26, down by 9.3% over the same period.
Meanwhile, the weekly price assessment for HRC imports to southern Europe was ?460-470 ($525-536) per tonne cfr main ports on December 26, declining by 10.6% over the fourth quarter. That price assessment reflects offers of the material from Turkey; but the market outlook may change in the first quarter 2019, when the EC is scheduled to set definitive measures in the safeguard case.
The EC may set definitive measures in the form of quarterly quotas for each country. Quotas are not expected to be applied to imported hot-rolled coil, however, market sources said, given that the European market has already been shielded from HRC originating from China, Russia, Ukraine, Iran and Brazil by anti-dumping measures.
"It remains unclear what measures and how they are going to be applied, so buyers will hold back from importing until it becomes clear how the definitive measures will be applied," an Italian source said. European mills are expected to increase official coil offers in attempt to use definitive measures to achieve transaction price gains.
Latin America
Although the Brazilian HRC market was largely unaffected by the US measure, the country's slab producers suffered an impact as the US is one of their largest buying markets. Immediately after the announcement of Section 232 tariffs, market participants had difficulties closing deals because of the uncertainty amid negotiations about a possible exclusion from the measure.
In April it became known that Brazil - along with the European Union, Argentina, Australia, Brazil and South Korea - would be temporarily exempted from the tariffs during negotiations. In early May producers agreed to limit their exports of semi-finished steel to the equivalent to 100% of the 2015-17 average export volume to the US.
Slab prices escalated persistently in the following months, climbing from $530-540 per tonne fob on February 2 to $540-545 per tonne on March 2 and $600-610 per tonne on April 13.
On April 27, the slab assessment widened downward to $560-600 per tonne from $600-610 per tonne the previous week, because the imminent quota created two different prices: one to the US, reflected on the higher end of the range, and another to the rest of the world, reflected on the lower end.
To settle the Brazilian export price in the US, buyers and sellers took as a rule of thumb the price of slab from the Commonwealth of Independent States, with a premium equivalent to half of the 25% tariff. This calculation has been heard to be used in current negotiations.
For instance, on July 2, when the CIS export slab price was $510-515 per tonne fob Black Sea, offers from Brazil to the US were heard above $570 per tonne fob. The availability of Brazilian material to US re-rollers was one of the drivers behind the price dynamics in the country, helping to increase offers of HRC at below market levels.
The quota was considered to be positive for Brazilian slab producers, who could maintain their volumes with much higher prices, according to sources. By late 2018, producers and clients were still attentive to the quota's limits and were booking significant volumes to Europe for March delivery, as a way to avoid exceeding limits, sources said.
The gap between Mexican steel domestic prices and the US has widened since the 232 tariffs were announced, according to Ternium. "Historically, US and Mexico prices go together, but Section 232 changed that," Ternium chief executive officer Máximo Vedoya said in late October.
Mexican producers have been expecting to reach a quota deal similar to those for South Korea and Brazil, but even with the conclusion of the US-Mexico-Canada Agreement, no changes have yet been implemented.
United States
After Section 232 was announced in the US in early March, US hot-rolled coil prices rose by 10.3%, or $85.60 per short ton, in about four months, to touch levels not seen for almost 10 years. US HRC prices hit a year-to-date peak in July at $45.84 per hundredweight ($916.80 per ton) - its highest level since October 2008 - up from $41.56 per cwt on March 8, according to Fastmarkets AMM pricing data.
While US hot-rolled prices did no rise by 25% after the tariffs were announced, the July peak marked a 43.3% increase since the Section 232 investigation officially started in April 2017 and a 23.3% increase since US Commerce Secretary Wilbur Ross said that Trump and his administration were considering massive across-the-board tariffs and restrictive quotas following the 232 probe in February.
At the same time, the US import HRC price rose by 21.2% between mid-March and mid-July, according to Fastmarkets AMM's import pricing data. That price assessment has since trended broadly lower, however, and some market participants argue that indicates a correction following a 232-driven increase and overly optimistic market sentiment earlier in 2018.
Notably, the US domestic HRC index has declined between the Monday and Friday of each week since November 12, according to Fastmarkets' pricing data. The fastest declines came in the week started November 26, when prices dropped by $26.20 per ton from Monday to Friday.
"From all indications - demand, futures, sentiment - it appears that the market is definitely softening," one HRC end user said in November. "But producers are still beating the drum about a strong [first quarter in 2019]."
"It will all come down to demand, and at some point, domestic buyers will rid themselves of the fear of import uncertainty," that end user added, noting that domestic HRC prices could normalize once that happens.
Nat Rudarakanchana in Chicago, Miranda Song in Shanghai, Felipe Peroni in São Paulo and Maria Tanatar in Dnepr, Ukraine, contributed to this report.
source: fastmarkets |
