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European steel market faces increasing pressure

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Analysts at S&P Global note growing problems in the automotive industry and growing pressure from environmental fees amid rising raw materials costs.

European steel market faces increasing pressure

The European steel market is facing growing pressure from weak demand, market protectionism and persistently high prices for iron ore and coking coal, S&P Global analysts said during a webinar Wednesday.

While steel production capacity cuts are underway, including ArcelorMittal announcing a production cut of 4.2 million tonnes per year, this may not be enough to accommodate darker scenarios and more the number of players will cut production, said credit analyst Elad Gelasco.

“The question is, will that be enough to adjust to current weakness? ... We believe that this will not be enough to compensate for the weakness of the market, "- said Gelasco.

Liberty Steel and US Steel have also announced production cuts at some European steel mills in recent weeks.

The European economic recovery is slowing, the auto industry is set to stagnate in 2019, and there is a potential relocation of auto lines to Japan, Gelasco said, adding that friction is present in the ongoing trade negotiations between the US and Europe, especially in the auto trade. Steel demand in Europe will increase by just 0.3 percent this year, and the fragile recovery will hit 1.2 percent in 2020, he said.

In addition, there is no evidence that the European Commission's import protection measures are contributing to the European market, while the price hike for CO 2 certificates is also problematic for steel producers, Gelasco said. .

Prices in the European steel market have been under downward pressure for several months amid global overcapacity in steel and rising levels of imports, which have recently surged, accounting for almost a quarter of market consumption.

“ArcelorMittal has a limited headroom to accommodate softer scenarios,” Gelasco said. “However, ArcelorMittal's rating at BBB- with a stable outlook has been maintained due to its commitment to debt reduction.

Gelasco teamed with S&P Global Market Intelligence Senior Metals and Mining Analyst Max Kort and MI Pangiva Supply Chain analyst Chris Rogers that protectionism in the steel markets has complicated market scenarios around the world.

“There is growing evidence of market disruption caused by increased protectionism,” said Court.

Widespread protectionism in steel markets, fueled by the imposition of import tariffs on steel under Article 232 in the United States in March 2018, "affects overall iron and steel supply chains," Rogers said. "Global supply chains are disrupted by trade war."

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