This Asian Import Could Spell Trouble for U.S. Businesses

The steel industry in the U.S. and Europe saw a significant downturn post the financial crisis of 2008/2009. However, the World Steel Association (WSO), in a report back in April, noted that steel demand in the U.S. and Europe is set to recover in 2014. Indeed, expectations of a recovery in demand had sparked a rally in steel stocks such as United States Steel (NYSE: X  ) and AK Steel Holding (NYSE: AKS  ) in the second half of last year.

The improvement in U.S. and European steel markets was also noted by European steelmaker ArcelorMittal (NYSE: MT  ) when it recently reported first-quarter results. Despite the expected recovery in demand, steel industry in the U.S. and Europe remains under pressure from increasing cheap imports from China and other Asian countries. There have already been growing calls against cheap imports in the U.S. -- and now the European Union (EU) has raised concerns over steel imports from China and Taiwan.

Steel demand recovering
In a report released in April this year, the WSO had said that while steel demand globally will weaken in 2014, it will improve in the U.S. and Europe. After years of downturn, this is a positive development for the steel industry in the U.S. and Europe.

This was something ArcelorMittal noted when the company reported its first-quarter results last month. Lakshmi N. Mittal, Chairman and CEO of the European steelmaker, said that the prospects for growth of the company's core markets in Europe and the U.S. are encouraging. Mittal also noted that the company's first-quarter results showed the improved year-over-year performance of its business driven by recovering steel markets.

According to the WSO, steel use in the EU is expected to grow 3.1% in 2014. In the U.S., steel use is expected to grow 4% this year and 3.7% in 2015.

While these forecasts are encouraging for U.S. and European steelmakers, rising imports from China and other Asian countries continue to remain a problem for steel companies on both sides of the Atlantic.

Rising imports
As I have noted in previous articles, the biggest concern for U.S. steel companies is rising imports from Asia, especially from China. European steelmakers also face the same threat. The WSO noted in its report that steel demand in China is expected to slow to 3% growth in 2014. However, there is massive overcapacity in the Chinese steel industry. As a result, Chinese steel, which is cheaper, is being exported to the U.S. and the EU.

U.S. steel companies have already raised concerns over the issue. Earlier this month, U.S. Steel said that it would close plants in Texas and Pennsylvania temporarily, citing illegally priced imports. The move from U.S. Steel has intensified the trade dispute with China and South Korea, who steelmakers in the U.S. say have been dumping steel products in the country.

The U.S. steel industry wants to impose tariffs on steel imported from South Korea. U.S. trade officials are expected to make a decision on the issue in August. Meanwhile, the U.S. has also opened investigations into imports of carbon and alloy steel wire rod from China. Steel imports from China and Taiwan have also come under scrutiny in Europe.

Europe raises concerns over steel imports
Reuters, citing a leading European steel executive, said that the European Commission will launch a probe into alleged dumping of stainless steel by Chinese and Taiwanese producers. Wolfgang Eder, CEO of Austrian steel company Voestalpine, told Reuters that the trade cases against cold-rolled stainless steel from China and Taiwan have been brought up to the European Commission. Eder said that to his knowledge the Commission has agreed to file the cases.

The cases against Asian steel producers highlight the biggest worry for European and U.S. steel companies. The anticipated recovery in steel demand in the U.S. and Europe is welcome after years of downturn. However, increasing imports from Asia, which are allegedly sold at artificially low prices, means that steel companies in the U.S. and Europe will not be able to capitalize on the trend. Indeed, without tariffs, U.S. and European steelmakers will struggle to compete against cheap imports.

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Varun Chandan

I have a Master in Finance degree from IE Business School in Madrid. I use the top-down approach when it comes to investing. I like to analyze macroeconomic factors and how they impact individual companies.

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