Brexit: boost or blow to UK flat steel?
With the UK poised to withdraw from the European Union and the single market, the steel industry is bracing for change. In 2016, 80% of the UK's total steel imports came from the EU — so what will its exit mean for manufacturers as well as for consumers?
The UK is set to trigger Article 50, starting the two-year process for withdrawal from the European Union. Prime Minister Theresa May has already signalled that the UK will leave the single market. The terms of the UK’s exit from the EU will be crucial for industry, including the country’s flat steel sector.
Since the closure of SSI’s Teesside plant in September 2015, the UK has been a net steel importer. Last year, net flat steel imports stood at almost 3 million tonnes, compared to demand of a little over 6 million tonnes.
But this is not the whole trade story — the UK’s total flat steel imports stood at just over 5 million tonnes in 2016, while exports totalled 2 million tonnes. Of the 5 million tonnes imported by the UK, 80% came from the EU. A similar proportion of UK flat steel was exported back to the continent.
The automotive industry currently drives steel demand growth in the UK. It also relies on a well-integrated supply chain that operates across borders and on flat steel trade with the EU. Automotive manufacturing accounts for about 4% of GDP and employs around 150,000 people. With these numbers, it is no surprise that the government has made a public commitment to support the automotive industry in Brexit negotiations. Steelmaking boasts more modest numbers. Crude steel production is responsible for around 0.1% of UK GDP and employs around 30,000 people.
Good news for steel users, bad news for steelmakers?
In our view, the likeliest scenario is that the UK will find itself with open borders with regards to commodity-grade flat steels.
This is good news for some — but not all — industry participants. The EU has imposed anti-dumping duties on flat steels such as HR coil and CR coil on imports from a number of countries including China, Russia, Brazil and Ukraine. Once the UK leaves the EU, anti-dumping duties would no longer protect domestic producers, nor would there be restrictions on UK buyers of material previously covered by these duties.
This would be good news for UK-based steel users, who could access cheaper, value-added material tariff-free. However, it would rapidly damage the standing of UK steelmakers, who would find it difficult to compete with cheaper seaborne supply.
Pros and cons of an import tariff
The quickest and easiest way for the UK to prevent domestic flat steel producers from being damaged by cheap imports would be to impose an import tax on all flat steels.
This, however, would apply to imports from all nations, and could make EU manufacturing cross-border supply chains, such as those automotive manufacturers rely on, less profitable. It could also weaken the UK’s post-Brexit negotiating position with potential trading partners. And it is unlikely that the government would protect the steel industry to the detriment of higher-growth, higher-value manufacturing
Another option is to impose tariffs that seek to prevent all steel imports. These would need to be higher than current EU anti-dumping duties on HR coil and CR coil, which range from 13.2% to 22.6%. If such tariffs were imposed, imports would be effectively frozen out of the UK market, creating a captive market for UK producers. The potential losers in this scenario are end users who are likely to foot the bill for any supply chain cost increases.
Could purely domestic production support demand?
Could the UK replace imports with domestic production? In theory, yes, but this would be hard to achieve.
The UK has adequate coating line capacity to support domestic demand, although utilisation rates are currently low, running at 33%. However, the 1.2 Mt of capacity, idled because it is uneconomic, is unlikely to restart without some level of government subsidy or regulations designed to reduce operating costs.
State aid is against EU law, but Brexit presents the opportunity for the UK government to provide assistance.
Should government intervention result in the successful replacement of imports with domestically produced steels, the steelmaking industry could benefit from leaving the single market. However, significant state aid would be needed to achieve this. But the impact on other industries will not be ignored — government decisions will not be made solely to benefit the steel industry.
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