Impact of Brexit on UK steel sector

The following extract is from an ISSB discussion about the probable impact of Brexit on the UK steel sector.

There has been much conjecture over both the short-term and long-term effects of the UK referendum vote to leave the EU but how will the result effect the steel industry in the country? The simple answer is of course that no-one knows for sure but there are some things we can look into.

One important aspect is the effect the vote will have on markets for steel products, and in particular the key automotive and construction sectors. The UK automotive sector has been a success story over the past few years with SMMT figures showing a 13.6% rise in production in the first five months of 2016. The successful future of this industry will most likely hinge on whether the UK can retain its free trade deal with the EU, an outcome viewed as likely given the importance of the UK as a premium market for German manufactured vehicles. In the short term, however, the uncertainty is thought to lead to a slow-down in growth for the industry.

The factors affecting the construction industry are rather different. Although the market has been strong in recent months with an estimated 9% growth in steel-intensive heavy construction based on heavy section sales, the Brexit vote brings uncertainty to the industry. The share price performance of the UK's listed construction companies hints at the fact the market is viewing a slowdown as likely with the construction of large steel-intensive buildings reliant to some extent on the economic health of the country as a whole. The industry may also experience cost inflation, particularly in regard to worker wage inflation if restrictions are placed on skilled EU workers entering the country.

While the outlook for the markets for steel products is mixed, the vote could potentially offer some hope to the steel industry. The UK steel industry has undergone an unprecedented period of turmoil over the past year with issues such as aggressively priced Chinese imports and expensive energy costs given as factors. In leaving the EU, Britain should be able to self-determine more effective solutions to both of these issues should the political will be forthcoming.

If domestic markets are about to enter uncertain times then more importance may be given to UK exports. One immediate effect of the Brexit vote was the depreciation of sterling. In just one month, the pound has fallen by 8% against both the US dollar and the euro which is a very significant slide in forex terms. This has the effect of making UK produced goods much more competitive in export markets and although raw material prices such as iron ore and coking coal will become relatively more expensive too, the steel scrap price will not be affected by currency movements.

Again, the success of the export market will likely depend on trade agreements struck with the US and the EU in particular but a look at the trade figures suggest an agreement should be in the best interests of many other EU nations.

The EU as a whole is the most important export market for the UK for finished steel. In Q1 of this year 685K tonnes of steel was shipped to the region, accounting for just under 65% of the total exported. Germany, Ireland and Belgium were the most important single markets in the EU, although it should be noted that non-EU Turkey was the largest market for UK produced steel.

Of importance, however, is the fact that this export figure was dwarfed by the import tonnage, with imports from the EU accounting for 71% of the total with the tonnage from the EU being nearly twice that of exports, at 1.2 million tonnes. This means that the UK is a large net importer of finished steel from the EU. In Q1, the UK imported more than 100K tonnes from each of the following member states: Germany, Spain, the Netherlands, Belgium and France. The UK was also the second largest "non-EU" destination for German steel after Switzerland, itself a member of the European Free Trade Association.

Whilst the British vote to leave the EU will likely cause heightened uncertainty and risk and much depends on the political will and diplomatic nous of the leaders of the country, it seems clear that there are potential opportunities for an industry that has suffered its fair share of issues over the past year.

For further information visit the ISSB website at http://www.issb.co.uk or check out http://www.steelonthenet.com for the latest steel news.

blogger@steelonthenet.com