Uncertainty in the global market after U.S. import tariffs
After the Trump government announced 25% import tariffs on steel in the month of March, confusion, and uncertainty has prevailed in the world steel market.
Although few countries like Canada, Mexico, Brazil, Argentina, South Korea and Europe have been temporarily exempted from the import tariffs, EU (European Union) has already started safeguard investigations into imports of certain steel products. Also, the exempted countries have been given the deadline of 1 May’18 to negotiate “satisfactory alternative means” in other words to conclude their negotiations with the U.S. which may be rather difficult prolonging the uncertainty.
Under these circumstances, it has become extremely difficult for the steel buyers to make business decisions and they are in a turmoil, not knowing what way to move.
Positive Demand and Higher Steel Prices in U.S.
Steel demand in U.S. is largely dependent upon construction sector which accounts for 40% of the country’s total steel requirement. Construction sector includes both residential and non-residential construction.
According to reports, 2017 was the best year for U.S. residential construction sector driven by a surge in apartment buildings and the momentum seems to be continuing in 2018 as well. Building permits in the US also increased by 7.4% YoY in Jan’18 to 1.4 million. The continued increase in building permits is a positive forward indicator for the housing sector.
In case of the non-residential sector, Architectural Billing Index (or ABI) a leading indicator of non-residential construction has kicked off the new year with highest level for January since 2007. A higher ABI indicates an increase in billing which further relates to increased future construction spending.
Although demand for steel in U.S. is quite strong, the supply has been limited due to an imposition of Section 232 tariffs pushing U.S. domestic steel prices higher. However, April is going to be quite a volatile month for the country in terms of prices and clarity will be regained only after negotiations are done with tariff exempted countries.
China to remain out of export market amid strong domestic demand
The steel prices in China which were going strong especially since Feb’18, underwent correction after the announcement of U.S. tariffs. This price fall was also supported by piled up inventories due to Chinese New Year Holidays. However, the situation normalized towards the March end and demand has picked up once again, resulting in an upsurge in domestic steel prices. Having said that, China still remains out of the global market for the time being and this combined with strong domestic demand is a positive factor. The impact of U.S. tariffs on Chinese steel is said to be quite limited as China accounted for only 2% of U.S. steel imports in 2017. With this, the fear that China will flood the global market with its steel products after the imposition of U.S. tariffs can be tamed.
Limited international competition and chances of more safeguards
U.S. import tariffs have triggered a trade war with major economies with China and EU. The chances are that other countries will also bring in trade restrictions in retaliation to U.S. tariffs. Now, as there is uncertainty about duties that may come in future, buyers are playing safe and there is low to medium completion in the international market. With lower steel volumes exported, all other regions are performing more strongly. Good steel production in the European and U.S. domestic markets is expected during the spring months. Global demand for steel products and ferrous scrap remains elevated at present.
The mixed global outlook for Q2 CY18
The steel demand across the globe is currently positive resulting which the price outlook for Q2 starting from April remains quite satisfactory. However, the upcoming Ramadan in May and June and U.S. election season starting at full speed on July 4 could change all that. Also, a lot can change again on May 1 (deadline for negotiation for exemptions) for the U.S.
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