China’s Steel Exports Under Pressure Year on Year; European Steelmakers Face Earnings Reassessment

Overview

Morgan Stanley has released its monthly tracking report on China’s steel exports, noting that while May’s export volume improved month on month, it continued to decline year on year, reflecting weak domestic demand in China. Meanwhile, in Europe, the implementation of CBAM and tightening safeguard measures have restricted imports and significantly widened regional price premiums. The report argues that this structural shift is driving the steel profit pool back toward European domestic mills, justifying an overweight rating for ArcelorMittal and Salzgitter.

Core views

China’s steel exports exhibit a pattern of “month-on-month gains, year-on-year declines.” In May, after adjusting for working days, net exports of finished steel rose roughly 10% month on month to 9.89 million tons, implying an annualized run rate of about 119 million tons—above analysts’ full-year 2026 forecast of 105 million tons. However, year-to-date, exports remain down roughly 8% compared with the same period last year, and output among member companies of the China Iron and Steel Association has fallen by about 7% year on year. Purchasing activity further slowed in late May, indicating that demand remains weak even after entering the traditional off-season. Europe’s steel market is accelerating its regionalization, as trade policies begin to take effect. Second-quarter indicators show that steel imports into Europe have decreased relative to the fourth quarter of 2025. Since the Middle East conflict erupted, the Antwerp HRC landed price has climbed by $70 per tonne, while China’s FOB price has risen by only $29 per tonne, widening Europe’s premium by $41 per tonne even before accounting for CBAM’s impact. This suggests that buyers, seeking to mitigate freight, insurance, and supply-chain disruption risks, are increasingly willing to pay a premium for proximity and reliability of supply. The policy framework will further underpin European steel prices. With CBAM set to take effect in January 2026 and safeguard measures tightening on July 1—imposing higher tariffs on non-quota imports—domestic pricing power in Europe is poised to strengthen. Although China accounts for only about 13% of Europe’s direct imports, the “melting and casting” provision could extend the policy’s reach through third countries. The report estimates that, even if demand fails to recover, this policy regime could generate a structural deficit of 10–15 million tonnes in Europe, pushing up clearing prices. Currently, the EU HRC spread has climbed to $404 per tonne, well above its long-term average of $320 per tonne. Based on these considerations, the report maintains a constructive yet selective stance on European carbon steel stocks. The steel profit pool is shifting toward domestic mills with integrated assets, flexible shipping capabilities, and the ability to capitalize on expanding regional premiums. ArcelorMittal is viewed as the preferred choice, owing to its superior production flexibility, stronger fixed-cost absorption, and capacity to gain market share under policy guidance; Salzgitter is also seen as a key beneficiary, with its earnings inflection point becoming increasingly evident.

Analysis framework

The report employs a three-dimensional analytical framework—trade flows, price differentials, and policy. First, it uses high-frequency import-export data to confirm that China’s spillover supply pressure has eased. Next, it quantifies the supply-chain security premium via the regional spread (EU HRC vs. China FOB), demonstrating that the market is repricing itself. Finally, it incorporates policy variables such as CBAM and safeguard measures to estimate Europe’s structural supply-demand gap. In stock selection, the firm focuses on domestic integrated steelmakers that benefit from both “import parity protection” and “capacity utilization enhancement” under the new trade regime, employing a cycle‑resilient EBITDA multiple approach to valuation, aiming to capture the upward shift in the industry’s long-term earnings center once policy benefits are fully realized.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Structural Shortage Estimation

  Rather than relying on short-term demand fluctuations, the report calculates Europe’s structural deficit of 10–15 million tonnes based on the rigidity of supply following import restrictions imposed by trade policies (CBAM + safeguard measures), even if demand does not recover. This serves as the core rationale for judging the floor of steel prices.

• Valuation MethodEV/EBITDA valuation

  Cycle-Resilient EBITDA Multiple Approach

  For highly cyclical steel stocks, the report eschews current‑period earnings-based valuations, instead using the 2027–2028 average EBITDA as the base and applying the historical average multiple (e.g., 7.1x for ArcelorMittal). This method smooths out cyclical volatility, reflecting the revaluation of the industry’s long-term earnings center under the new trade policy regime.

• Industry/Industrial Analysis FrameworkVolume-price decomposition

  Regional Premium Breakdown

  By analyzing the differential between the changes in Antwerp’s landed price ($70) and China’s FOB price ($29), the report attributes the widening spread to a supply-chain security premium rather than purely fundamental supply-and-demand dynamics, helping investors distinguish between cyclical rebounds and structural reassessments.

Asset mapping & comparison

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

• ArcelorMittal SA (MT.AS)

  Preferred stock, benefiting from tightening European trade policies and widening regional premiums

  Strengths

  High production flexibility, strong fixed‑cost absorption, clear advantages from integrated local assets

  Comparison

  Compared with European peers, ArcelorMittal is better positioned to seize market share when policy‑guided marginal tonnage returns to the domestic supply chain

  Risks

  Stronger-than‑expected Chinese demand or supply-side reforms leading to reduced exports; faster-than‑expected recovery in key end‑market demand; large‑scale buyback programs

• Salzgitter AG (SZGG.DE)

  Key beneficiary, with an earnings inflection point becoming increasingly apparent

  Strengths

  New EU policy framework creates room for margin expansion; HKM asset restructuring is expected to boost performance

  Risks

  Revaluation of Aurubis shares; weaker-than‑expected European demand environment; delays in SALCOS project expenditures

Key data

• May Net Exports of Finished Steel from China9.89 million tonsApproximately 10% higher month on month (adjusted for working days), implying an annualized run rate of about 119 million tons
• Year-to-Date YoY Change in China’s Steel Exports-8%Despite the month-on-month improvement in May, cumulative exports remain below last year’s level
• EU HRC Spread$404 per tonneAbove its long-term average of $320 per tonne, reflecting tightening regional supply
• Estimated Structural Deficit in Europe10–15 million tonnesA supply gap that could emerge under the new policy framework, even if demand does not recover
• ArcelorMittal Valuation Multiple7.1x EV/EBITDABased on the 2027–2028 average EBITDA, consistent with its historical average

Impact & implications

For Europe’s steel industry, the substantive implementation of trade policies marks a structural improvement in the competitive landscape. Import restrictions not only reduce the influx of low‑cost resources but, more importantly, reshape perceptions of supply-chain security through “rules of origin,” granting domestic mills greater bargaining power and earnings stability. As a result, the valuation logic for European steelmakers is shifting from pure cyclical speculation to a period of policy‑driven, defensive‑style value realization. For Chinese steelmakers, the diversion of external demand is becoming more challenging, compelling them to adjust their domestic supply side or accelerate overseas plant construction to circumvent trade barriers.

Risks

• Robust Chinese steel demand or supply‑side reforms leading to a sharp drop in exports
• Faster‑than‑expected recovery in key end‑market demand
• Weak Chinese demand driving up export volumes and depressing seaborne freight rates
• Escalation of trade tensions dampening global demand
• Re‑softening of end markets and contraction of steel price spreads
• Large‑scale investments by companies in unexpected regions

What to watch

• Implementation of EU safeguard measure quotas and the actual impact of extra‑quota tariffs
• Changes in China’s steel output and export pace during the summer off‑season
• Progress of downstream end‑market recovery in Europe and the persistence of the HRC spread
• Quarterly EBITDA/t metrics for ArcelorMittal and Salzgitter