Steel industry trying to assess Mercosur-EU trade deal

Following the announcement of the historic Mercosur-EU trade deal late last week, steel industry players from both regions are still trying to make sense of what was agreed and have so far come to different conclusions.

On Wednesday, Charles de Lusignan, spokesperson and communications manager at the European Steel Association (Eurofer), told BNamericas that given the agreement only came out a few days ago, the association is still in the assessment phase of its impact analysis.

"Steel trade volumes between the EU and South American countries is fairly even, and Eurofer nevertheless hopes that trade relations between the two blocs will be improved as a result of this agreement," de Lusignan said.

On the other side of the Atlantic, Brazil's steel industry association IABr told BNamericas on Tuesday that the trade deal appears not to bring gains for the local sector.

IABr said the Brazilian steel industry will lose its preferential status with fellow Mercosur nations Argentina, Uruguay and Paraguay, as a result of the free trade deal. Furthermore, there is a risk of having materials from countries outside the EU entering the Brazilian market disguised as local products.

"Any opening without correcting asymmetries only aggravates the local steel industry's situation, which already faces a depressed market and global steel oversupply of 545Mt," IABr said.

OVERSUPPLY

In the first five months of the year, steel production in China spiked to 405Mt, a 10.2% year-on-year increase. The Asian giant accounted for 53% of total steel produced in the 64 countries taken into account by Worldsteel, representing 99% of the global production and an output of 764Mt.

ABN AMRO said in a research report on Wednesday that the global steel sector is currently cornered, with global output expanding fast without any significant growth in end-user demand.

"Inventories at steel mills remain high and a lot of cheap steel is flooding export markets. The sector receives financial support through tax regimes or all sorts of stimulating economic policies," said Casper Burgering, senior economist for industrial metals and agricultural commodities at ABN AMRO.

"This results in the creation of a huge pool of inefficient and non-productive steel companies [in China]. These zombie companies have enabled the global production capacity to grow into an untameable monster. The steel sector has been struggling with this situation for a long time and for now, it will continue to affect the industry," Burgering added.

Latin American steel association Alacero is also concerned about the impact that massive steel output from China is having on regional producers. In a note to clients on June 28, the association said that the share of steel imports in regional consumption rose 2% year-on-year in January-April and reached 37% of the total.

"It confirms the dependence of consumption on imported rolled steel, in the face of falls in cumulative production. The deficit registered in January-April 2019 was 4.8Mt, with 384,000t more than January-April of the previous year (4.4Mt)," Alacero added.

OUTPUT CUTS

On June 23, steel mills in the Chinese city of Tangshan in the steel producing hub of Hebei province were ordered to cut sintering operations by up to 50% in a bid to curb air pollution.

Chinese industry news service Mysteel called the move the toughest restrictions yet, as nearly 30 steelmakers were affected by the regulation.

"Tangshan steel mills have been ramping up their blast furnace (BF) capacity utilization steadily and gradually since early May. The average capacity utilization rate of 138 BFs in Tangshan is expected to drop to 59% in this period. This should translate to a drop in molten iron output by 5.2Mt/m," Mysteel said in a report on June 28.

"China's daily crude steel output every ten days had been persisting high and refreshed the record time and again, according to surveys from Mysteel and China's iron and steel association (CISA). If the restrictions are fully implemented, Mysteel estimates a drop in output for finished steel in Tangshan by 4.9Mt/m," the report said.