Trump’s tariffs, Chinese over-production and Brexit: Steel is at the centre of global geopolitics. What does this mean for the price of steel? Binyamin Ali and Lucy Alderson report.
The UK steel industry has endured a particularly tumultuous period over the past three years.
In September 2015, the sector hit the headlines as Thailand-based Sahaviriya Steel Industries (SSI) shut its plant in Redcar, Teeside. SSI’s UK subsidiary was put into liquidation the following month, which led to the loss of more than1,700 jobs and SSI taking a £500m hit.
The industry suffered further setbacks as the year drew to a close, most notably Caparo Industries going into administration in October, but worse was yet to come.
In March 2016, Tata Steel, the biggest producer operating in the country, announced it had put its UK plants up for sale. The Indian conglomerate’s decision put 17,000 jobs at risk, leading the then business minister Anna Soubry to tell Radio 4 that the government would consider taking temporary ownership of the business until a buyer was found.
Two months later, Tata Steel Europe posted a £71m loss. Chief executive Hans Fischer blamed the performance on European steel being “undermined by continued surging imports in 2015” that were undercutting their products.
A significant proportion of these imports were coming from China. Between 2009 and 2014, EU28 steel imports from the country rose by 50 per cent, according to the UK Steel’s 2014 annual review.
It was around this time that disquiet surrounding the dominance of China within the global steel market came to a head.
“Between the beginning of 2013 and the end of 2014, the Chinese moved from having zero presence in the UK to take 37 per cent of the market in the fourth quarter”
UK Steel annual review, 2014
There were concerns that China was ‘dumping’ steel onto the global market and selling at below market rates. This prompted the EU to introduce its own ‘anti-dumping measures’ on some Chinese steel products in April 2016, raising the price of imports coming into the trading bloc.
A month later, the US raised its own tariffs on imports of cold-rolled steel from China to 522 per cent in May 2016, up from 266 per cent. President Obama’s move has since been expanded upon by the Trump administration.
Brexit has also had an impact on the price of steel imports into the UK, most notably due to the depreciation of the pound after the referendum in June 2016.
With so many factors affecting prices across the domestic and global steel markets, what do the next 12-18 months hold for steel fabricators in the construction industry?
One of the biggest influences on the price of steel has been a surplus of global stock. There has been consistent year-on-year growth in the volume of steel produced internationally since the early 2000s.
In the 30 years between 1975 and 2005, global steel production grew by 504m tonnes to 1.15bn, according to the World Steel Association. Since then it has grown by the same volume in less than 12 years, increasing by 541m tonnes between 2005 and 2017 to stand at 1.69bn.
Much of this soaring growth has been down to increases in steel production across emerging economies, with China being the chief instigator. Of the 1.69bn tonnes of global steel produced in 2017, China accounted for almost half – 831.7m tonnes.
construction steel price indices
The global market was beginning to feel the weight of Chinese expansion as recession hit in 2008, despite its economy beginning to slow. According to UK Steel’s 2014 annual review, China’s steel exports grew by 300 per cent between 2009 and 2014.
The UK steel product worst-affected by this flood of Chinese produce was concrete reinforcing bars (rebar). “Between the beginning of 2013 and the end of 2014, the Chinese moved from having zero presence in the UK to take 37 per cent of the market in the fourth quarter,” the UK Steel report stated. “A surge of this magnitude is unprecedented. It threatens the very existence of rebar production in the UK.”
Trends and developments that have a negative impact on UK steel production will not always, however, adversely impact steel fabricators. In fact, China “dumping steel was driving prices down,” says Arcadis director Will Waller.
Trump, Turkey and tariffs
As well as the production and policies of heavyweights such as the US and China, the fortunes of other major steel-producing countries also have a significant bearing on UK steelwork.
Turkey was the world’s eighth biggest producer in 2017, churning out more steel than any EU country with the exception of Germany.
However, Turkey has seen a “significant devaluation of currency against the dollar” while the latter has been “riding high” partly due to Trump’s tariffs, Arcadis’ Mr Waller says.
Turkish lira has broadly weakened against the dollar since Trump implemented his 25 per cent tariffs on steel and 10 per cent on aluminium imports from the EU, Mexico and Canada in May this year.
On the day the duties were announced, the dollar was buying 4.53 lira. By 31 July the dollar was buying 4.91 lira and by the end of August this figure stood at 6.60 lira.
The cost of importing has increased as Turkey’s currency has weakened, with Mr Waller citing the likely impact on the cost of production in these markets. Margins among steel manufacturers could become leaner as a result, heightening the risk of these suppliers running into financial risk.
However, the “bigger threat” lies in financial issues that Turkish companies may face due to seeking finance in foreign currencies. “Many businesses in emerging markets have taken advantage of longer maturities and lower interest rates of borrowing in euros and dollars rather than in their home currencies in recent years,” Mr Waller says.
“However, the devaluation of lira has made the cost of Turkish debt spiral upwards. It makes servicing that debt more expensive, which could land them [Turkish companies] in financial trouble.”
As a result, there could be a heightened financial risk for UK contractors choosing to link up with Turkish steel suppliers. “This could potentially create a problem for projects in the UK if they are relying on steel sourced from those suppliers,” Mr Waller says. “Costs could be driven upwards or the steel might not come, as the supplier might go bust.”
However, he says the threat is not immediate, describing the situation as one for contractors to “watch out” for when sourcing steel from this market.
Though positive for steel fabricators, the threat China’s steel posed to European producers led the EU to impose duties on Chinese high-performance reinforcement bars (HPF rebars) in April 2016. The anti-dumping duties on HPF rebars were set at 18.4-22.5 per cent and were implemented for five years to 2021.
More recently in March 2018, the EU extended an existing duty on Chinese seamless pipes and tubes of stainless steel by five years. The duties range from 48.3 per cent to 71.9 per cent and were first imposed in 2011.
Despite this, Chinese steel continues to be widely used in the European market.
“Most construction forecasts will be made on the assumption that there will be a deal between the UK and the EU”
Prof Noble Francis, CPA
Victor Buyck Steel Construction director Ghislain van Tieghem says the contractor has a preference in favour of European steel. However, there are many examples of “very large steel construction [and] people have no problem with [the steel] coming from the far east”.
Mr Van Tieghem adds that “government allows this […] while at the same time they like to talk about sustainability. It’s a bit of a contradiction”.
His criticism of government action could suggest some UK steel fabricators believe neither Westminster nor Brussels have gone far enough. How then does the European response to Chinese steel compare with that of the US?
Trump’s trade tariffs
Amid the global fluctuations in the steel market since 2015, the US took one of the most significant steps to protect its markets in 2016 during the Obama administration, raising tariffs on cold-rolled steel from China to 522 per cent.
This was followed by Obama’s successor Donald Trump slapping 25 per cent tariffs on steel and 10 per cent on aluminium imports from the EU, Mexico and Canada in May this year.
Although steel fabricators in UK construction may not feel directly affected by Trump’s tariffs, Arcadis’ Mr Waller points out that the president’s measures could have the knock-on effect of actually reducing prices.
“The steel tariffs could impact the volumes of steel available in any given marketplace,” he says. “Markets previously able to export steel competitively to the US before the tariffs were introduced, such as the EU, may be left with more surplus steel. This could potentially reduce costs in those markets.”
Despite this, in the long term the impact of these tariffs could still result in overall price increases, Mr Waller explains. If the UK leaves the EU without a deal and without access to the single market, it will default to trading under World Trade Organisation rules.
The WTO regulates global trade and was “working quite well and driving global growth” before Trump implemented his tariffs, Mr Waller argues. The president’s actions, however, have undermined the organisation, he suggests, prompting countries to apply “tit-for-tat” tariffs on US goods.
These recent trade spats suggest the WTO “isn’t working as effectively as it could be”, Mr Waller continues. This could pose a risk to the UK if it finds itself relying on the WTO system following Brexit.
“If the UK gets into this cycle of putting tariffs on each other’s goods, it could be quite negative for global trade,” he says. “If someone puts a tariff on one of our exports, we’ll have to respond and put a tariff on one of our imports. You could see the cost of importing go up – which could include steel.”
As a result, Mr Waller argues that Brexit could pose a more significant risk than Trump’s tariffs alone.
Deal or no deal?
After the UK voted to leave the EU in June 2016, many markets saw price hikes in key imports, with steel being no exception.
As the value of the pound fell after the result of the EU referendum, the price of steel imports began to rise, with some products seeing double-digit price inflation. According to a construction materials data report from the Department for Business, Energy and Industrial Strategy, the price of fabricated structural steel increased by 15 per cent between June 2016 and June 2017.
From January to August this year, prices have stayed relatively flat in comparison, rising by 4 per cent over this period. However, any future price changes will largely depend on the outcome of Brexit negotiations, according to CPA economics director Noble Francis.
EU flags European Union flags Brexit referendum
If the UK and EU are able to reach a deal, Prof Francis predicts that sterling will strengthen and could subsequently help ease or even reverse the rise in UK import prices – a good news story for contractors sourcing steel.
However, the opposite could occur under a no-deal scenario, as uncertainty risks devaluing the pound to rates “similar to the extent we experienced after the referendum”, Prof Francis says. This could potentially drive double-digit price increases among imported products – including fabricated steel – similar to those seen after the EU referendum.
Prof Francis says that, while it is difficult to predict what will happen to the price of imported steel products, the demand for steel is expected to stay “largely flat” for the next 12-18 months.
However, this will inevitably vary across UK sectors and regions. “For example, in Manchester and Salford, you might see substantial increases in demand due to the amount of construction work occurring there,” he says.
Recent global trade disputes coupled with the ongoing Brexit negotiations have heightened uncertainty over the medium-term outlook for steel prices, he adds.
However, Prof Francis says the likelihood of the UK agreeing a Brexit deal is increased by the fact that the alternative is not in the interests of any parties involved. “Most construction forecasts will be made on the assumption that there will be a deal between the UK and the EU,” he says.
“But you have the uncertainty around trade disputes. We will just have to wait and see what will happen.”