Jefferies: EU steel trader and importer roundtable

Key Takeaway

JEF yesterday hosted a roundtable with UK-based steel trader & importer Nick Lally.

 

EC Safeguard Measures Looming. Long publicised and much awaited, European Commission (EC) safeguard measures are expected to be announced next week (likely 17 or 18 July) with expectations for soft quotas on a product-by-product basis, based on ave 2016-2017 levels. Tariff rates above said quotas are anticipated to be 25%, in-line with US Section 232 though it remains to be seen if quotas will be implemented on a country-by-country or global basis. With buyers looking to smooth deliveries around quarterly quota resets, we expect importers to make use of bonded warehouses, storing tonnage temporarily and waiting for quotas to re-set before bringing them in country; however, this is sure to increase the cost of importing. Detailed analysis of the impact of tariff-rate quotas on EU imports can be found in yesterday’s Franchise Note (link HERE, Exhibits 67-68).
UK and EU Inventories Well Below Normal. While 2017 anti-dumping duties (prelim Aug 2017 / final Feb 2018) against Chinese HDG created a wave of pre-buying that pushed inventories higher, there has not been the same opportunity ahead of safeguard measures. The early 2018 inventory overhang, in part due to poor weather and mediocre sentiment, has been worked through with healthy demand YTD. Inventory levels are reportedly broadly well below historical averages, with one UK port’s stock levels -67% YoY, as we approach a seasonal restocking period in Sept. Importantly, most material at ports is already pre-sold, with just 20-30% unsold vs 50% last year, highlighting current market tightness.
EU Prices Expected to Move Higher. Low inventory levels, healthy demand and a catalyst in EC safeguard measures present a strong set-up for EU steel prices. Even absent safeguard measures, the current environment, compounded by mills already operating at high utilisation rates, could push EU prices >5% higher in H2. However, with the positive impact from EC safeguards, EU prices could potentially be +20% higher by year-end according to Mr. Lally, well beyond street estimates or what is priced into steel equities, while shy of the move seen (+27% in 6 months) post safeguards in 2002.
Section 232 Experience Suggests Broad-Based Acceptance of Higher Steel Prices. Euro steel consumers’ response to rising prices has been mixed to date with broader acceptance from large vs small customers. But across the board, Mr Lally saw no notable negative impact on demand from rising prices/costs. Notably, based on experience in the US post-232 implementation, Lally expects Euro steel consumers’ acceptance of higher prices to improve meaningfully once safeguard measures are confirmed and policy implications known. For automakers, expectations for annual contract negotiations are rising (EU OEM contracts primarily re-set at calendar year-end), though contracts will certainly not reflect full spot price volatility; for every 10% spot price increase (above pure cost-push), a 2-3% achievement in higher annual contracts is expected.
Import Arb Increasingly Complex; Deliveries Expected to Fall. Relative to the US, where traders benefit from a liquid futures market with which to hedge, traders in Europe take on more pricing risk when ordering longer-dated imports. Current orders for Chinese material (letter of credit through delivery) reportedly lock up capital for 270 days. Russian HRC, with eight weeks shorter shipping relative to Chinese material, is being offered at just a €10/t discount to domestic Europe, providing little incentive. With long lead times and narrow import arbs, imports were already beginning to dry-up as of Q2; with safeguards likely to be confirmed in coming days, a sizable drop in imports is highly likely in H2.
 

Click here for full PDF version: https://javatar.bluematrix.com/pdf/sMPz52ya?id=apryan2733@gmail.com

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