Industry turning point emerges! Rising energy costs combined with EU protection measures boost steel prices, European steel companies collectively predict increased Q1 profits.

Analysts say that after experiencing more than six quarters of poor performance in financial reports, European steel manufacturers are expected to see a rebound, with the first quarter of 2026 potentially marking a turning point for the industry. Although demand has not yet recovered to the levels seen in 2022, rising energy prices and new EU protective measures leading to reduced imports from outside the region have driven European steel prices up faster than expected in recent months. Data shows that in the past six months, European hot rolled coil prices have risen by around 20%. According to data compiled by LSEG, higher steel prices will boost the performance of European steel manufacturers, with almost all European steel manufacturers expecting first quarter profits this year to be higher than the same period last year and the previous quarter. Earlier this month, the EU reached a preliminary agreement to cut steel imports by nearly half and impose a 50% tariff on excess steel imports to protect the EU steel industry. Under the agreement, the new measures will cap duty-free steel imports at 18.3 million tons per year, a 47% decrease from 2024, and double the tariffs on excess quotas. Parties have also committed to gradually phasing out Russian steel imports by September 2028. The preliminary agreement will only come into effect after formal approval by the European Council and the European Parliament. Maxim Kogge, an analyst at French banking giant Oddo BHF, says that aside from demand factors, conditions for the industry have generally become favorable. Kogge said, "In the past we only had some one-off import restrictions. Now the whole system has been fundamentally strengthened structurally." Surprisingly, the Middle East war has also benefited European steel manufacturers in some ways, though this positive impact may not be enough to offset its negative effects. The war has increased uncertainty, threatened further investment and procurement activities, and unexpectedly led to a contraction in eurozone business activity. However, the war seems to have boosted the competitiveness of European steel manufacturers. Hans-Joerg Pack, senior equity portfolio manager at German asset manager DWS, said, "Especially in commodities and specialty chemicals, the impact on Asian peers is much greater than on European peers, as they are much more dependent on Middle East energy." Analysts from a US bank wrote in an investor report earlier this month that higher shipping costs have helped the steel market develop a "regionalization" trend, and European customers' purchasing behavior has also changed. Concerned about supply disruptions, customers have turned to domestic producers for procurement. However, the damage caused by the Middle East war to demand remains a concern. After the escalation of the situation in the Middle East, the World Steel Association lowered its forecast for EU and UK steel demand growth in 2026 from 3.2% to 1.3% in April. The decline in demand will undoubtedly hinder the recovery of the European steel industry. Energy costs remain a hidden worry. A report from the US bank warned that industrial electricity prices for European steel manufacturers are over 50% higher than their Chinese and Indian competitors and more than double that of US steel companies. Furthermore, the European steel industry had hoped for a boost from Germany's defense spending plan, but Kogge said that the plan "has yet to have any tangible effect." He added that the market had expected the plan to start affecting order inflows from the second half of this year, but now that expectation seems unlikely to materialize. Analysts say that the speed of the recovery of the European steel industry now depends on the development of the situation in the Middle East, as higher inflation may force the European Central Bank to raise interest rates, suppressing demand. The European Central Bank will announce its latest rate decision on April 30th. Currently, ECB officials are weighing whether to raise borrowing costs to prevent the spike in energy prices resulting from the Middle East conflict from evolving into broader inflationary pressures. However, at the same time, ECB officials also need to consider the negative impact of tightening monetary policy on economic growth. The European economy is currently facing several unfavorable factors, such as US tariffs, weak external demand, and rising energy prices, which will impact the transformation of the European manufacturing industry, and energy-intensive industries will face significant pressure. Analysts believe that if the energy crisis persists for a long time, inflation may spread to multiple industries, weakening the momentum of European economic growth and leading to stagflation with high inflation and stagnant growth in Europe. Economists expect the European Central Bank to announce on April 30th that it will maintain the deposit facility rate at 2%. Additionally, economists believe that with new economic forecasts to be released at the June meeting, they will be able to assess more clearly the impact of the Middle East conflict on the economy, and the European Central Bank is expected to raise rates once in June in response to the impact of the Middle East conflict and reverse this measure next year to protect economic growth. The median forecast of the survey shows that by September 2027, the euro area deposit facility rate will fall back to 2%.