European steel producers appear to have shrugged off concerns over the impact of US tariffs, with sh...
European steel producers appear to have shrugged off concerns over the impact of US tariffs, with share prices rebounding to near pre-US government intervention levels.
The share price of leading European steel producers fell by about 10% following the Bush administration's 4 March decision to impose tariffs of 8-30% on imports of foreign produced steel. Since then, they have regained much of the loss.
John Hatherly, head of global analysis at M&G, believes the tariffs will have little impact on European steel manufacturers as they export little to the US. He says only 4% of steel produced by Anglo-Dutch company Corus goes to the US market, for example.
Hatherly says: 'The impact on European steel exports will be negligible as it is not a key market for companies such as Corus and Arcelor.
'The tariffs were really aimed at Asian and Eastern European producers. Share prices in steel producers initially fell, as it was felt that, with the US market effectively closed to them, Asian producers may look to offload their excess capacity in Europe.'
The sector has been one of the best performers in Europe over the past six months, because the aggressive cost-cutting started by Corus and the newly-formed Arcelor and the expectation that, as the European market recovers, steel ' a cyclical sector ' should perform well.
Hatherly adds: 'The problem is that should Asian producers look to the European market to unload their production excess, European producers will not be able to push through price hikes increasing their profit margins, which have been cut to the bone in recent years.'
Britannic European equity investment manager Kevin McLardy agrees with Hatherly's analysis of the situation but feels the risk that Asian and Eastern European producers will flood Europe with cheap steel has been overestimated.
While accepting it is a threat, he believes the European Union (EU) will begin to police the existing quota restrictions on Eastern European imports in a firmer fashion, and will apply tariffs of its own if Asian imports become a problem.
McLardy says: ' I don't think it will come to that though. The EU has lodged a complaint regarding the legality of the US government's actions with the World Trade Organisation (WTO). If the EU was to impose its own sanctions then it would undermine its case at the WTO.'
Perhaps more importantly, McLardy sees the threat of a deluge of cheap Asian steel as having receded in recent weeks. Asian manufacturers do not have any pricing power either and are also cutting capacity in order to allow global prices to rise.
McLardy adds: 'The key issue here is pricing. Corus has just announced its prices in the UK and Europe will rise from the beginning of April. Some 70% of the industry is operating at below cash cost and steel prices are at 20-year lows. The question is how will Arcelor respond?'
If, as expected, Arcelor also raises its prices, the extra profitability this will bring as large consumers of steel, such as the auto industry, rebuild their inventories should see the sector continue to do well in the short term, he says.
European steel producers bounce back.
Tariffs will have limited impact on Europe.
Deluge of cheap Asian steel not yet appeared.
Asia may offload excess steel in Europe.
Pricing power would be reduced if so.
Europe may impose tariffs of its own.
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