Reading Time: 2.6 minutes The European Union announced in early February 2019 that it will be joining the US in its trade war by curbing steel imports into the EU block. Iron ore prices on the New York Mercantile exchange initially reacted by closing up 14.4% in a single days trade. The EU sited the US trade tariffs from 2018 as the primary reason for the EU being forced to enter the trade war to prevent dumping from China and other steel producers. The EU appointed a commission in March 2018 to investigate the steel market after Trump imposed tariffs on Chinese steel and Aluminum imports into the US. The EU commission was set up to investigate steel imports across 28 products and specifically the impact of the US trade tariffs on these steel products. The commission found that the most significant increase in imports took place in the period 2013-2016. Subsequently, imports continued to increase at a slower pace before picking up again in the first 6 months of 2018, when the US Section 232 measures came into effect. The Commission concluded that there has been a sudden, steep, and significant increase of imports both in absolute and relative terms for the products concerned under assessment. This finding is also confirmed by the data at the level of each of the product families assessed. The value of annual global steel production dwarfs the rest of the base metal market. In fact the value of annual steel production is larger than the value of all other base metals production added together. The month to month changes in steel imports between the US and EU paints an almost symmetrical picture. (see chart above) While the EU imports have been increasing for 9 months of 2018, in contrast the US imports have decreased for 8 months and in some months by very large amounts. The EU also conducted an analysis into the impact on employment and showed that the EU industry was in a difficult economic situation until 2016 and only partially recovered in 2017. The industry is thus still in a fragile and vulnerable position. From 2 February 2019 the EU allowed for controlled import quotas across 26 of the 28 steel products per import partner. Once quota levels are exceeded a 25% tariff will apply. This announcement is in line with the US tariff that was applied a year ago, where 25% tariff was applied to steel imports from China. The looming threat of China The chart below shows that China produces more than 50% of global steel which is 8 times more than its closest competitor Japan. If the demand for Chinese steel were to drop, it could create an excess of available steel on the global market. This has become a real concern since China GDP continued to slow in 2018 and is expected to slow even more during 2019. If China are restricted from selling steel to the US and now to the EU, they will be forced to either stockpile steel or slow production. The strategic importance of South Africa The EU tariffs exclude 10 developing countries which are predominately in Africa other than the Island of Fiji. The only country in this block that produces steel is South Africa who produces less than half a percent of the global steel, hardly a threat to the EU import market. What’s interesting about South Africa is that they produce 70% of the global Platinum and 36% of global Palladium. There is currently a shortage of Palladium worldwide and the only other big producer is Russia who produces 41% of global supply. Russia currently exports steel product to the EU so tariffs will apply to their exports to the EU. As South Africa‘s steel production is an insignificant proportion of EU imports, it would appear that the real reason for the exclusion is for the EU to preserve the relationship with South Africa due to its strategic supply of Palladium and Platinum. Conclusion An oversupply of steel or Iron ore would typically drive their respective prices lower. The recent price increase in Iron ore would appear to be a “knee jerk” reaction to the EU announcement. The recent collapse of the slims dam by the world’s largest producer, VALE, could put upward pressure on Iron ore prices in the short term. Until economic activity increases globally and in China, it’s hard to foresee Iron ore and steel prices maintaining these levels. Disclaimer: The views thoughts and opinions expressed within this article are those of the author and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.