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Western shift to protectionism threatens Aussie steel makers

Tim BinstedReporter
Updated

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A surge in trade protectionism in the US and Europe is threatening to push more steel into south-east Asia and depress profits for already stretched Australian producers.

Shares in BlueScope Steel have plunged 40 per cent this year in the face of weak steel prices, while Arrium is still trying to run its OneSteel business to conserve cash as the oversupply crimps margins.

Bank of America Merrill Lynch's global team of steel analysts warns that growing western hostility to foreign steel imports could put further pressure on already reduced steel margins in Asia.

A flood of excess steel in Asia could hurt Australian manufacturers. Simon Dawson

"We believe the most negatively impacted region may be the rest of Asia [excluding China], which could feel the brunt of any redirected exports," BAML said in a research note.

"For example if we look at the recent case against grain oriented electrical steel into Europe, we spoke to a larger player in this market who told us that much of their product is simply expected to be redirected to Africa and south-east Asia."

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China produces around half of the world's steel, and exports from the world's second biggest economy have been increasing as its economy and steel-intensive infrastructure investment slow.

BAML is predicting a 6.5 million surplus of steel exports in 2015 and Western countries have shown an increased willingness to protect domestic industry.

Anti-dumping investigation

The European Commission this month launched an anti-dumping investigation into imports of cold rolled steel from China and Russia, which supply approximately 10 per cent of Europe's total carbon steel imports.

BlueScope only makes 120,000 tonnes of cold rolled coil a year so the direct impact from this measure is marginal.

But the growing trend toward protectionism could see other more relevant steel products covered by duties.

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Two weeks ago the EC imposed provisional tariffs on imports of grain-oriented flat-rolled electrical steel, following on from duties imposed in March on select steel imports from China and Taiwan.

In the United States steel maker Nucor and AK Steel have stepped up their rhetoric against Chinese steel imports and US Steel has signalled its intent to file anti-dumping claims.

"The surge in imports is unprecedented. It's no longer a matter of if we're going to file, it's a matter of when," US Steel chief executive Mario Longhi told Reuters earlier this month.

Both Arrium and BlueScope have called loudly for a tightening of anti-dumping rules concerning steel imports into Australia, especially around circumvention of existing duties.

Material injury

At the same time the two steel makers argue that dumping is causing them material injury, they are also suffering from the collapse in iron ore prices which has made their respective iron ore and iron sands export businesses uncompetitive.

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Following the sharp sell-off of BlueScope shares, Deutsche Bank analyst Emily Smith said the market is ascribing no value at all to BlueScope's Australian business.

"We believe the current BlueScope share price implies zero value for Australia. We do not believe this is justified," Ms Smith said. "Nonetheless, it is difficult to identify a near-term [positive] catalyst at this stage."

Some fund managers have taken the sell-off as an opportunity to load up on the steel makers.

Perpetual has increased its stake in BlueScope to 13.2 per cent from 8.45 per cent this year.

Allan Gray has upped its investment in Arrium, which is partly based on an anticipated recovery in steel, to 15.57 per cent from 12.15 per cent.

Tim Binsted writes on Business specialising in Agriculture, Construction, Manufacturing. Tim is based in our Sydney newsroom. Connect with Tim on Twitter.

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