Industry leaders are “extremely worried” about an expected surge of aluminium and steel onto the European market in light of new US import tariffs.
While some investors breathed a sigh of relief when the White House exempted the EU and other allies from its import tariffs of 25% on steel and 10% on aluminium, others have warned that the exemptions could cause metals from Asia to flood the Eurozone and drive prices down. This is a cause for concern not only for the European industry, but for trade financiers as well.
“Tariffs will affect the whole market,” warns David Coulon, PwC partner in commodity management. “Trade financiers should look at the health of all their clients involved in steel and aluminium trading, not only those which have a US exposure.”
Manufacturing representatives European Aluminium and UK Steel have also vocalised their worries over the risk of oversupply on the European market.
“For UK Steel members it’s extremely worrying,” says Gareth Stace, director of UK Steel, the industry’s trade association in Britain.
“At 40 million tonnes a year, the EU is by far the largest import market in the world and will be the obvious target for major steel exporters to the US, such as Turkey and Russia,” he points out.
Gerd Götz, director general of European Aluminium, calls the risk of oversupply a “major challenge”, adding that primary aluminium exports from targeted countries such as China could increase by 20%. This, he says, “opens the door to uncertainty for our industry”.
Trade diversions this summer are likely in the eyes of Ross Denton, partner of European trade at law firm Baker McKenzie. Denton believes the knock-on impact will soon affect soft commodities as China moves to retaliate over the US terms. He tells GTR that “a huge number of disruptions” will spread “like ripples in a pond” across Europe, with retaliations having “an amplifying effect” and provoking punitive measures in kind.
Meanwhile, manufacturers have also expressed concern about the fact that the EU tariff exclusion only officially lasts until May 1. The temporary reprieve – granted a priori to Canada and Mexico, and under negotiation for Australia, Argentina, Brazil and South Korea – leaves European manufacturers in limbo for the near-term.
“Unfortunately, it would be safe to say that there would be job losses” in the event that the EU exemption did not become permanent, Stace says.
To makes matters worse, the White House has reportedly not ruled out imposing import quotas on international suppliers, including those currently exempted from the tariffs.
From a strategy point of view, Coulon at PwC cautions exporters and importers to “be wary of taking any large fixed price positions” and look outside of traditional risk metrics for warning signs. In the event of no extension to the EU’s exemption, or if retaliatory tariffs were to follow, Coulon predicts a “significant drop in seaborne trade”.
“In particular there could be a temptation to default on contracts”, he adds.
Further explaining the implications for traders and their financiers, Coulon says: “For trade finance providers, where the financing is committed, lenders need to understand how much stress their clients are under as a result of the tariff. Some companies rely on international trade to generate margin: if this goes down significantly, there could be some serious impacts on the profitability of some traders.”
Other experts are more optimistic about how the ‘trade war’ will pan out. Economist and author Rebecca Harding characterises the tariffs as a shift towards “belligerence” in US trade policy because of President Donald Trump’s invocation of national security, which is referenced in every paragraph of the announcement of the tariffs on March 22.
Yet Harding reads Trump’s policy moves as “just a raising of tensions” to win concessions from China. “I anticipate that this is simply a rhetorical war,” she tells GTR. “There has to be some kind of compromise between the US and China because a trade war is actually too damaging and, most worryingly of all, it will affect the US’ trade position.”