European trade barriers are strengthening, with the steel profit pool continuing to shift back to local mills

Overview

The report focuses on the resilience of Chinese steel exports and their impact on the European market. China's net exports of finished steel products in July declined only slightly month-on-month, and export levels remained elevated despite a decline in domestic production. Meanwhile, the EU Carbon Border Adjustment Mechanism, safeguard measures, import quotas, and potential anti-dumping measures on cold-rolled products are raising import barriers, driving regional price premiums, order visibility, and improvements in steelmakers' profitability.

Core views

Chinese steel exports have not yet seen a material decline, but the European market is gradually being insulated from global oversupply. Restricted imports, improved capacity utilization, and a recovery in orders will cause the European steel profit pool to refocus on local mills and push the mid-cycle level of per-tonne steel EBITDA higher. European carbon steel companies with local integrated capacity, flexible shipping capabilities, and high sensitivity to regional premiums are the biggest beneficiaries. Among them, ArcelorMittal has stronger capabilities in volume adjustment, fixed-cost absorption, and market share gains, while Salzgitter benefits from sensitivity to local German pricing as well as optionality from HKM and the slab business.

Analysis framework

The report combines cross-analysis of China's monthly steel import and export data, EU import sources and quarterly quota utilization, trade policy changes, European hot-rolled coil prices and raw material cost spreads, mill order feedback, and capacity utilization, and values related stocks using average EBITDA for 2027 to 2028 and historical mid-cycle multiples.

Methodology notes

• Trade flow analysisMonthly net exports and annualized run-rate analysis

  Calculate monthly net exports by subtracting imports from exports of finished steel products, and annualize the export run rate based on the current monthly level.

  This method is used to determine whether China's export pressure has changed materially and to compare the current annualized level of about 116 million tonnes with the 2026 forecast of about 110 million tonnes.

• Policy scenario analysisImport quota and trade barrier analysis

  Assess effective import supply by combining EU safeguard measures, CBAM, anti-dumping policies, and quota utilization rates by source country.

  Rapid quota exhaustion and increasing trade frictions may suppress imports and create a structural supply gap of 10 to 15 million tonnes in Europe, thereby reinforcing the regional price floor.

• Relative valuationMid-cycle EV/EBITDA valuation method

  Use average EBITDA for 2027 to 2028 and match it with each company's own historical average valuation multiple.

  2027 to 2028 is viewed as the first phase in which Europe's new trade policy framework is more fully reflected in industry earnings; ArcelorMittal uses a historical average multiple of 7.1x, and Salzgitter uses 7.0x.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• ArcelorMittal SA (MT.AS)

  Top pick for European margin recovery, rated Overweight.

  Strengths

  Its global and European capacity footprint gives it strong shipping and volume adjustment capabilities; it can improve fixed-cost absorption by increasing local European output and seek market share gains as marginal imports decline.

  Weaknesses

  Its business is geographically broad, leaving it still significantly exposed to the global steel cycle, Chinese demand, and seaborne steel prices.

  Comparison

  Compared with Salzgitter, ArcelorMittal has greater scale, volume flexibility, and room to gain market share, and is therefore listed as the top pick.

  Risks

  Further weakening of Chinese demand leading to higher exports, renewed deterioration in European end-demand, contraction in steel spreads, and larger-than-expected investments in new regions.

• Salzgitter AG (SZGG.DE)

  An important beneficiary of stronger European policy and higher local German steel prices, rated Overweight.

  Strengths

  It is sensitive to local German steel prices and European regional premiums, and has upside optionality from the HKM restructuring, slab supply, and the value of its Aurubis stake.

  Weaknesses

  Earnings are relatively concentrated in European demand and regional steel prices, while low-carbon transition projects entail high capital expenditure requirements.

  Comparison

  Compared with ArcelorMittal, it has weaker scale and volume adjustment capabilities, but its sensitivity to local German pricing and HKM- and Aurubis-related optionality are more prominent.

  Risks

  European demand weaker than expected, a decline in Aurubis's share price, deviations in spending progress across SALCOS phases from plan, and HKM restructuring failing to achieve expected benefits.

Key data

• China's net exports of finished steel products in July9.676 million tonnesExports were 10.121 million tonnes and imports were 0.445 million tonnes; down 2% MoM after working-day adjustment.
• YoY and year-to-date change in net exportsUp 3% YoY; down 4% year-to-dateDespite the pullback, the absolute level of exports remains elevated.
• Annualized export run rateAbout 116 million tonnes/yearAbove Morgan Stanley's China materials team's forecast of about 110 million tonnes for 2026.
• Change in China's steel productionDown 6.3% YoY year-to-dateBased on a survey by the China Iron and Steel Association, but the production decline has not yet led to a meaningful contraction in exports.
• Potential structural supply gap in Europe10 to 15 million tonnesThe report believes that import restrictions could create this gap even if demand does not recover.
• EU third-quarter quota utilizationOverall about 40%Some quotas for Turkey and Indonesia have been exhausted, while India's utilization exceeds 50%; the three account for about 45% of EU hot-rolled coil imports year-to-date.
• European hot-rolled coil spreadUS$467/tonneThe long-term average is about US$320/tonne, with the current level about US$147/tonne higher.
• Valuation multiplesArcelorMittal 7.1x; Salzgitter 7.0xBoth are based on average EBITDA for 2027 to 2028 and each company's own historical average multiple.

Impact & implications

Policy-driven import contraction could further decouple European steel prices from the global seaborne market, enhancing local mills' pricing power and order visibility. As regional premiums widen, capacity utilization rises, and fixed-cost absorption improves, European steel companies' per-tonne steel EBITDA is expected to reset at a higher level. From an investment perspective, priority should be given to companies with local integrated European assets, volume adjustment capabilities, and sensitivity to regional prices, while continuously assessing uncertainties around Chinese export pressure and European end-demand.

Risks

• Chinese steel demand weakens further, prompting increased exports and depressing global seaborne steel prices.
• European end-markets weaken again, causing orders, capacity utilization, and steel spreads to decline.
• Implementation of EU safeguard measures, CBAM, or anti-dumping policies is weaker than expected, reducing the effectiveness of import restrictions.
• Shifts in trade sources or quota reallocations cause the decline in European imports to be smaller than expected.
• Steel companies' capital expenditure, restructuring, or regional expansion exceeds expectations, weakening free cash flow and valuation support.
• Morgan Stanley has shareholdings, investment banking business, or other commercial relationships with some covered companies, which may constitute potential conflicts of interest.

What to watch

• Whether China's monthly net exports of finished steel products can continue to decline from an annualized level of about 116 million tonnes.
• Whether the decline in China's steel production ultimately translates into a meaningful contraction in export volumes.
• The pace of utilization of EU third-quarter quotas by product and source country, and subsequent replenishment arrangements.
• The final terms and implementation timing of CBAM, safeguard measures, and anti-dumping measures on cold-rolled products.
• European mills' fourth-quarter order book filling, price increase realization, and capacity utilization.
• Whether the European hot-rolled coil spread can remain near US$467/tonne or continue to widen.
• ArcelorMittal's European volume adjustments, fixed-cost absorption, and share buyback progress.
• Salzgitter's HKM restructuring, changes in Aurubis value, and SALCOS project spending progress.