In the absence of EU tariffs, China-origin steel imports are likely to remain at a high level in 2016, continuing pressure on the sales prices of western European mills, according to Fitch. Producers are seen continuing to offset this pressure by reducing capital expenditure.

Driven by Chinese overcapacity, Fitch expects EU flat product imports to rise 20% on-year in 2015, while longs imports should grow 10-15%. “We do not believe that the level of excess Chinese steelmaking capacity has yet peaked,” the credit rating agency says in a report sent to Kallanish. “For 2016, without the introduction of tariffs, it is difficult to foresee a reduction in the absolute level of imports, although we would expect the rate of growth to moderate significantly.”

The agency sees European end-user demand rising up to 2.5% in 2016 versus a projected 1.6-1.8% growth this year. Regional automotive output should rise 3% in 2016, driven by domestic demand thanks to improving economic conditions in Europe. Automotive export demand growth will weaken – despite a weaker euro – due to the slowdown in emerging markets.

EU construction activity is seen growing 1.8-2.3% in 2016 thanks to demand from new build and renovation activity in the residential sector. Growth in the EU commercial property sector is seen remaining fragile. The UK, Netherlands, Spain and Scandinavia should register the strongest activity.

EU mechanical engineering is expected to improve in 2016 from its slow forecasted growth of 1% this year on emerging market demand weakness. Growth in 2016 is projected at 1.6% thanks to a recovery in Eurozone economies. Exporters will benefit from improved price competitiveness due to euro weakness.

Fitch’s rating and sector outlook for western European steel are both negative for 2016. Commenting on potential EU steel import tariffs, the agency says: “Some action on tariffs would appear likely and in isolation would be positive for market prices and producer margins.” However, this action may not be sufficient to change the sector outlook.

Fitch expects iron ore prices to average at $50/tonne in 2016 with a strong likelihood of periods below this level (see Kallanish 20 October 2015).