The world’s biggest steelmakers are bracing for tough year as trade disputes and weakening automotive demand cast a chill over the sector.

ArcelorMittal, which posted its lowest quarterly profit since 2016, warned on Thursday that the European steel market will be far weaker than expected this year as demand contracts and producers struggle against cheap imports. The world’s biggest steelmaker also lowered its forecast for demand outside of China.

The gloom spreading through the steel industry marks a sharp reversal after two years of bumper profits, driven by strong demand across all major markets and slowing exports from China. Now, creaking economies in Europe and increased trade tensions are undermining the recovery.

ArcelorMittal expects demand in Europe to contract by 1% this year, compared with an earlier forecast of 1 per cent growth. That’s even more pessimistic than regional lobby group Eurofer, which said earlier this week it expects demand to fall by 0.4 per cent. Still, there is good news on China, where ArcelorMittal has reversed its forecast and now projects demand will rise this year.

Read also: ArcelorMittal cuts estimate of steel demand outside China

Market conditions in the first quarter of 2019 have been challenging, ArcelorMittal said on Thursday. Demand has generally been lacklustre, reflecting softness in manufacturing activity and continued weakness in automotive.

European steelmakers are facing two big headaches. Domestic demand is stagnating, especially from the region’s automakers, while cheaper imports of steel continue to pour in to the continent despite more stringent trade defenses. That’s also making it hard for them to pass on higher prices for iron ore, a key steelmaking ingredient, that are being stoked by mine closures in Brazil.

Products for cars are among the most profitable for steelmakers, especially for Germany’s premium brands that demand high-quality metal. The industry accounts for about 20% of total steel demand.

Yet the region’s car sales are being hit hard. Car sales declined for seven straight months through March, with automakers including BMW AG posting weak sales. Even manufacturers like Renault SA, which have fared better in Europe, see little prospect for growth.

Its not just carmakers -- Europe’s whole manufacturing sector is struggling. Germany, the regions industrial engine, narrowly avoided a recession at the end of 2018, while Italy is also floundering.

As domestic demand falls, imports are compounding the challenges for European steelmakers. While the US has been very aggressive in shutting out foreign steel -- using a Cold War-era law -- Europe has been slower to respond. Its now put in place safeguard measures, designed to cap flows, but the industry says more needs to be done.

Last year, European demand rose 3.3 per cent, imports increased 13 per cent and domestic output expanded just 1.7 per cent. Much of that increase is blamed on shipments that would have been destined for the U.S. being diverted to Europe instead, while Turkeys worsening economy has led to a big jump in metal from Europe’s southeastern neighbour.

The impact on steelmakers is clear. A gauge of European producers fell to the lowest since mid-2016 , while producers like Kloeckner & Co. have disappointed. The German steelmaker issued a profit warning last month, saying weak orders and lower metal prices were hurting earnings.

ArcelorMittal earlier this week said it was reducing output in Poland and Spain. The cuts will lower production of flat steel, used in cars and machinery, by 3 million tonne a year, about 3.2 per cent of Europe’s total flat-steel output.

The steel industry in Europe can have a strong future but there must be a level playing field to ensure that an unfair advantage is not given to competitors outside the region, ArcelorMittal said on Thursday.

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