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Say it quietly, but protectionism really works well-- for the steel market, at least. Bolting the door against imports has made a difference in the US, and should do in Europe too. The US in particular has form. Back in 2001, then President George w Bush took action for steelmakers struggling with an economic recession and a strong US dollar. In the three years up to late 2001, mills accounting for nearly a third of US capacity had filed for bankruptcy.
In March 2002, the White House finally introduced blanket tariffs of 30% on the price of imported steel products. This action had a direct effect upon imports and US steel prices, which never fell that low again. Then came the explosive growth of China's own steel industry. Back in 2001, it exported just 5.5 million tonnes. Today, it exports 20 times that, 13 and 1/2 percent of its production. One reason-- it makes too much steel. Less than 3/4 of its mill capacity gets used.
Nevertheless, steel prices everywhere have rebounded, and may keep going. Just as a programme of public works spending accelerated in China, the US government decided to protect its domestic industry with a new series of import tariffs from late 2015. Imports into the US, which had been on the rise, peaked last year.
The European Union last year followed the US in setting its own series of trade tariffs. Though imports to the EU have yet to fall, that has not stopped European hot rolled coil prices surging 77% over 12 months. Global steel shares did even better, doubling over the same period. These jumps in market value discount a big recovery in earnings. The sector price earnings multiple is now well above the decade average of 16 times.
Yet if history is any guide, profitability has much further to rise. Operating profit margins for the largest steelmakers-- ArcelorMittal, POSCO, Nippon Steel-- average under 5%, half the amount of a decade ago. Assuming prices can hold relatively steady, an improvement should follow. That may sound a big if, given China's persistent excess capacity. Even so, trade barriers take time to dismantle, which should support steelmakers in the US and Europe for a while longer yet.
