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  • Writer's pictureAtlas Commodities Limited.

The Atlas Opinion: BREXIT

Atlas analyses the challenges and opportunities that leaving the European Union could present for the UK’s struggling steel industry.

COVID19 has dealt the European steel sector a heavy blow. Coming on the heels of Brexit and global trade tensions, the crisis has also highlighted the region’s overcapacity problem.

As much as 18.9 million mt of steelmaking capacity was taken offline in Europe during the market slump caused by the pandemic – more than in any other region. This comes on top of 2019’s marginal contraction in production.

The collapse in demand brought about by widespread lockdowns is not the only worry for steelmakers. The current global health crisis may have pushed Brexit to one side, but the issue is resurfacing as the end of the transition period looms.

In March, the automotive sector shut down almost completely all over Europe, with very few exceptions. In light of the major economic crisis facing the auto industry, the European Automobile Manufacturers’ Association radically revised its 2020 forecast for passenger car registrations to a drop of 25% year on year, on 23 June. That means the body expects car sales in the European Union to tumble by more than 3 million units to some 9.6 million units this year.

Following the first shockwaves of the crisis between mid-March and May, the EU market has contracted by 41.5% so far this year. This situation is expected to ease as lockdown and containment measures are lifted throughout the region. However, some EU countries have explicitly planned to restart public construction projects as quickly as possible to use it as a countercyclical tool during the unprecedented economic downturn. Meanwhile, steelmakers, as well as other industries, have sought government funds to keep them afloat. The World Steel Association has said it expects global demand to fall by 6.4% to 1.65 billion mt of steel in 2020. While a recovery is clearly underway in China, and steel demand is forecast to grow 1% this year, worldsteel expected steel markets in Europe, North America, India and other Asian economies to take longer to rebound.

The consequences of the coronavirus-related shutdown for industrial activity stretch far beyond Europe - They have reached a global scale, in terms of huge disruption to supply chains and supplies of input and raw materials.

The early demand and output data for this year shows the dramatic impact of coronavirus, but in in 2019 there were already signs the steel market was struggling. Business conditions deteriorated, with the trend accelerating in the second half, particularly in the automotive industry, although the construction sector continued to outperform other major steelconsuming sectors.

According to European steel producers, even after the end of the pandemic, external risks will continue to cast a shadow over steel-consuming industrial sectors into 2021, and will likely hamper investment. The possibility of a no-deal Brexit – as the final agreement with the EU must be reached before the end of 2020 – continues to generate uncertainty, while a new escalation in protectionist trade measures would contribute to a sustained bearish outlook.

The current crisis has again brought into focus the issue of overcapacity in the European steel sector. Steelmakers in the region have been focusing on the automotive industry for years by reopening previously idled production lines or building entirely new ones. The demand from the car industry was going from strength to strength until the emission testing scheme changes put a halt on it in 2018.

A slowdown was long feared but mills pushed on with their race towards the automotive industry. Those whose biggest customers are the car industry are now hurting the most. The Steel industry is waiting to see what type of Government support is forthcoming for the Automotive Industry, perhaps in the form of a scrapple scheme, or no VAT on new purchases, which would go some way to rebuilding the Automotive Industry.

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