China’s steel exports ease slightly from elevated levels as Europe’s HRC spread hits a record
China’s net exports of finished steel fell slightly in July, declining 2% month over month to 9.676 million metric tons.
China’s net exports of finished steel fell slightly in July, declining 2% month over month to 9.676 million metric tons. The annualized run rate remained high at 116 million metric tons, above Morgan Stanley’s full-year forecast of about 110 million metric tons.
The European Union’s hot-rolled coil spread surged to $467 per metric ton, well above its long-term average of about $320 per metric ton. Morgan Stanley said the gap reflects increasingly tight import restrictions, including the Carbon Border Adjustment Mechanism and safeguard measures. Quotas for major source countries, including Turkey, Indonesia and China, have been exhausted.
Morgan Stanley expects a structural shortage of 10 million to 15 million metric tons in Europe even without a recovery in demand. It names ArcelorMittal and Salzgitter as its preferred European steel exposures as regional steel margins continue to recover. ArcelorMittal has greater flexibility as production is shifted toward domestic supply, while Salzgitter benefits from its high sensitivity to domestic pricing, according to the note.
In summary, China’s steel exports remain elevated but have limited room for further growth. Tighter European import restrictions are accelerating the return of profit to domestic mills, while the steel-price spread has reached a record high. Morgan Stanley said European steel companies could see a structural earnings recovery.
Potential beneficiaries include ArcelorMittal (MT.US) and Salzgitter (SZG.DE), as well as the broader European steel industry. Chinese steel exporters face a headwind because their export opportunities are constrained. The current EU HRC spread is far above its historical average, but Morgan Stanley said the European mills’ margin-recovery thesis has not yet been fully priced in. The impact of the formal implementation of CBAM will be a key factor.
Potential catalysts identified by Morgan Stanley are: progress toward formal implementation of the EU’s CBAM and any further import restrictions; the extent to which European mills fill their fourth-quarter orders; whether China’s steel-production cuts are strengthened; and subsequent utilization of the European Union’s third-quarter safeguard quotas.
The European Union’s hot-rolled coil spread surged to $467 per metric ton, well above its long-term average of about $320 per metric ton. Morgan Stanley said the gap reflects increasingly tight import restrictions, including the Carbon Border Adjustment Mechanism and safeguard measures. Quotas for major source countries, including Turkey, Indonesia and China, have been exhausted.
Morgan Stanley expects a structural shortage of 10 million to 15 million metric tons in Europe even without a recovery in demand. It names ArcelorMittal and Salzgitter as its preferred European steel exposures as regional steel margins continue to recover. ArcelorMittal has greater flexibility as production is shifted toward domestic supply, while Salzgitter benefits from its high sensitivity to domestic pricing, according to the note.
In summary, China’s steel exports remain elevated but have limited room for further growth. Tighter European import restrictions are accelerating the return of profit to domestic mills, while the steel-price spread has reached a record high. Morgan Stanley said European steel companies could see a structural earnings recovery.
Potential beneficiaries include ArcelorMittal (MT.US) and Salzgitter (SZG.DE), as well as the broader European steel industry. Chinese steel exporters face a headwind because their export opportunities are constrained. The current EU HRC spread is far above its historical average, but Morgan Stanley said the European mills’ margin-recovery thesis has not yet been fully priced in. The impact of the formal implementation of CBAM will be a key factor.
Potential catalysts identified by Morgan Stanley are: progress toward formal implementation of the EU’s CBAM and any further import restrictions; the extent to which European mills fill their fourth-quarter orders; whether China’s steel-production cuts are strengthened; and subsequent utilization of the European Union’s third-quarter safeguard quotas.