The best purchasing strategy in the face of EU steel safeguard measures
The European Commission has proposed its definitive tariff measures. I’m sure you will like to go know how far they go.
At the end of past week, the European Commission officially notified to the World Trade Organisation they will impose definitive safeguard measures on steel imports. The official version can be found here (link).
As we reported on this blog (here) these safeguard measures are now definitive, but are still subject to possible changes prior to their application.
The contingency quota structure, overall is now more complex
All steel products subject to provisional measures face a set of tariff quotas, based on the average volume of imports over the period 2015–17 plus 5%. Once the quota is exceeded, more material can be imported without limit, but facing a tariff of 25%. In case anti-dumping measures are already in place, only the highest rate will apply.
How long will these measures last?
Quotas will apply for three specific time periods. The first period will run from 2 February to 30 June this year and will be followed by two annual periods ending on 30 June 2020 and 2021. The volume of the available quota will be increased by 5% in each period.
Knowing how it works is only for experts
According CRU, Hot rolled steel coils have specific quotas for all European Union countries. So far there is no problem. But all other steel products are established country by country and product by product for all specified time periods. In practice it assumes a calculation of “residual quotas” for each steel product which will be divided into four equal calendar quarters, so the first quarterly quota will end on 31 March of this year and will be apportioned accordingly. The unused quota volume can be carried over to the following quarter. If the volume remains in this residual quota in the last quarter of each tariff period (i.e. during the second quarter of each year), exporters with country-specific quotas can also access the remaining residual quota if they have exhausted their own.
If you survived the reading of the previous paragraph we congratulate you, as you will have realized that the mechanism is not clear since for many steel components, the quotas depend on each country, and in turn, depend on a calculation that can move over time and in turn, depends on import flows that are expected to change and in turn, involves a reduction in the supply of duty-free imports each following year, and in turn, depends on information that will only be available to customs managers. In short, these protectionist measures imply a complexity that did not exist before.
How does it affect stainless steel?
Looking back, even with safeguard measures, stainless steel prices began to weaken from the summer of 2018 and reached their lowest level in two years in December, as we consider here (link).
In order to keep market share, European producers cut prices to keep the utilisation rates of their facilities high. While the market was flooded with both European and Asian material. Unfortunately, demand also declined among end users due to uncertainty about the end-safeguards.
Some analysts think that this new version of tariff measures would be restrictive enough to support a recovery in stainless steel prices in the second quarter of this year, but not immediately. Prices continued to fall in January 2019. Alloy surcharges also show no signs of increase. However, there may be improvements in market conditions after the first quarter.
Most imports of stainless steel come from Asia, which takes at least three months to reach Europe. At the beginning of the provisional safeguard period in August and September 2018, the provisional quota for stainless steel was slowly completed at the beginning and today there is a large unfulfilled quota. However, the cold rolled stainless steel quotas for the first period specified in the measure (February 2019 and June 2019) could now be affected.
What impact could it have on Europe?
In the United States, anti-dumping measures, yes, there have been significant changes in domestic supply. As a result, production and use of domestic steel has increased. Steel mills have reopened assets and started to invest in additional capacity. Could the same thing happen in Europe? It may be, but it may also be less pronounced, partly because trade barriers in Europe are lower than in the United States. As far as safeguards are concerned, tariffs will only apply once quotas have been exhausted, while American Section 232 applies to every tonne of steel arriving outside the quotas. Many of the European safeguards are also lower than those in the United States, although we generally understand that they would still be strong enough to change the customer import behaviour. The US has long been a structural net importer, even being geographically distant from global markets, Europe is not in the same geographical position (please note that the EU has recently become a net importer, led by flat products). There are already a number of initiatives to invest in EU production capacity, but none of them are explicitly linked to safeguards or other protectionist measures, at least in our knowledge.
I’m responsible for purchasing. What decision should I make? How should I buy?
The implicit complexity of this mechanism will be understood all over time. But here are some preliminary comments:
Purchases in targeted countries with quotas can preferably be weighted to ensure arrivals in the first part of the quota period. This is the alternative with the lowest risk.
If you work with a supplier from a country where the quota is quickly exhausted, you have to keep in mind that you should wait until the second quarter of the current year until an additional duty-free quota can be opened, but there is a risk that you will not finally have a residual quota and face a 25% tariff. Stay well informed with your customs broker.
Scheduling a purchase for delivery in September or beyond may likely still be far from exhausted. But it is an alternative at the risk of facing a 25% tariff.
The classic dynamic of scheduling purchases and reduce inventories at end the year, can be now more complicated by the fact that the period of strong demand in the year does not coincide with the opening of residual quotas. Purchases will therefore have to be fine-tuned.
If all European buyers schedule purchases in months 2 or 3 at the same time, it is likely that the customs warehousing space will be saturated and there will be penalties for delays, or to require bank guarantees of tariff liability (refundable if later estimated within the quota). In other words, there could be a negative implication on the company’s capital flow.
It is likely that buying in Europe is now more attractive than going to buy in remote markets, where delivery times are longer and less predictable (well, this is not new) but now makes more sense than ever. Probably this is the root of the trade safeguards
Disclaimer: The content of this article reflects our view and is not a recommendation to buy or sell any asset, and you cannot take as indication of future results. Each buyer must do his own analysis. Although we took all reasonable care in writing this post, it is possible that the information in it is incomplete or incorrect or may differ of what you know. Please remember that the indicated data and our views are subject to change without notice and we have no obligation to update the information contained herein.
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