Late last year, we published an Insight on what a no-deal Brexit would mean for UK-EU trade (CRU Subscribers only) in the context of the EU’s safeguard measures against finished steel imports.
While the Brexit negotiations are still ongoing, the European Commission has now published new quota figures for the first half of 2021 – in which the UK is treated as a third country for purposes of imports. Comparing the new quotas to historical export volumes highlights several product groups where UK-EU trade could become severely restricted.
Brexit upends the EU safeguard quotas
The UK leaving the umbrella of the EU’s safeguard quotas has affected the trade measures in multiple ways:
- The UK has received its own quota volumes for almost all the product groups currently covered by the quota.
- The total quota volumes available from countries other than the UK have shrunk, as they no longer need to account for the volumes which the UK was importing while the UK was part of the EU. Once the UK is included, the total quota volumes available across all countries within a product group have variably grown or shrunk depending on the net import position of the UK.
- The rebalancing of the quotas according to point 2 has meant that certain developing countries have been excluded from the measures or will now become subject to the measures, as their share of total EU imports was been recalculated with the UK excluded. Specifically, the UAE has been excluded from the hollow sections and other welded tubes quotas, Turkey has been excluded from the global large welded tubes quota and China has been included in the seamless stainless pipes and tubes quota with its own country-specific volumes.
The new UK quota volumes have been calculated using the same methodology as all other quotas in the safeguard measures. The European Commission has used the years of 2015-2017 as a point of reference and applied the standard liberalisation schedule of 5% + 3% per completed safeguard year. As mentioned in the original Insight, this calculation has left certain quota undersized compared to historical trade volumes.
The chart and table below show historical trade and new quota volumes for the product groups where the UK has received its own country-specific quotas.
Data: IHS Markit, CRU
Note: Data on metallic coated sheet is incomplete. Ratio column shows the ratio between average historical exports and new quota volumes, where a larger number means that the quota is proportionately smaller than historical exports.
Certain product quotas are insufficient…
The product groups with the tightest quotas according to our assessment are the rail, large welded tubes, cold finished bars quotas and organic coated sheet quotas. These are the quotas where the average quarterly imports between 2018 and 2020 were greater than the quarterly quotas the UK is to receive. These are products where we can expect to see structural changes in the market in reaction to the quotas, especially if the measures are extended beyond the next two quarters.
In the case of rail this is a significant discrepancy—average quarterly exports to the EU27 were almost two and a half times greater than the new quarterly quotas, with some quarters registering exports up to four times what the new quota will allow. This will give continental rail producers such as voestalpine and Liberty Group via the newly acquired Hayange plant a significant upper hand, as UK producer British Steel will be substantially hampered in their access to the market.
The EU27 accounted for an average of 76% of total UK rail exports between 2018Q1 and 2019Q4, with the share in three quarters rising to above 90%. Almost all ex-EU27 exports were inconsistent, with spikes to individual countries in only one or two quarters indicating one-off sales instead of steady access to a market. This suggests that the UK—and by extension, British Steel as the UK’s rail exporter—will be heavily impacted by this quota, with the majority of their customers now behind an insufficient quota followed by a 25% tariff once this is exhausted. The UK’s ex-EU27 orderbook appears mostly sporadic with few steady markets, meaning that there is no obvious, reliable outlet to redirect these rail exports to. This would leave an exporting mill with three options: lower their production, find new ex-EU27 markets within the next two months, or redirect as much as possible to the domestic market.
If the EU is unable to compensate domestically for the loss of around 28 kt of annualised rail imports from the UK, then imports from other sources would need to more than triple to make up the difference. This is impossible given the current structure of the safeguard quotas, where total imports from sources other than the UK average around 8.9 kt per year and are capped by the quotas at an annualised 14 kt. That said, the EU27 has around 3 Mt of rail rolling capacity, with further capacity expected to come online at the JSW-owned Aferpi plant in Italy. The capacity exists to take over production from the UK, while UK production would need to be redirected elsewhere—presumably primarily to the domestic market.
We also expect that the other product quotas mentioned above will also fill early within each quarter, with the large welded tubes quota being a particularly tight example. This quota would have been exceeded by UK exports in every single quarter between 2018Q1 and 2019Q3, in part by up to more than twice the volume.
…while others are tight but manageable
Certain other product groups, while broadly averaging export levels which are sustainable under the new quotas, have shown multiple quarterly spikes which would have exceeded the volumes available in a single quarter. These include primarily hot rolled coil, wire rod, merchant bar, gas pipes and other welded pipes.
These are product groups where the effects of the quotas are expected to be less severe, but the available volumes here may present a problem within individual quarters or in the case of increasing exports in the future. As the newest trade data available for the UK is from January 2020, it is difficult to estimate how the effects of the Covid-19 pandemic or the Jingye Group takeover of British Steel may have led to changes in trade flows which could now present a problem under the new quotas.
Unlike the products with insufficient quotas discussed earlier, these products are less likely to see a structural change in their markets. There will be pressure on both buyers and sellers to time their trades in order to avoid running into the tariffs, but it should be possible to broadly maintain current export levels. There will however be very little room for growth for these products.
