Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

The rise in China's domestic steel prices in December, along with similar gains in the U.S. and Europe, ought to spell relief for steelmakers like Lakshmi Mittal. Not so fast.

Industry Reeling
Steel shares in Europe have been hit by China's surplus
Source: Bloomberg data

China's domestic steel prices have begun to wane again in recent days, and the deluge of cheap Chinese steel heading for export shows no sign of declining. Western steelmakers like ArcelorMittal need to knuckle down for a prolonged winter.

Steel prices couldn’t fall in perpetuity -- some kind of a bounce was inevitable. Analysts attribute the rebound to seasonal effects, as well as sales tax cuts that have spurred auto production in China. The government is also pressing the steel industry to restructure, so production cuts at loss-making mills may also be playing their part.

Despite the government's efforts to reduce capacity, it would be unwise to expect a swift plunge given so many plants planned during the boom years have come on line. And with a weakening economy and construction stalling, there few strong reasons to expect a revival in Chinese demand for steel that would help soak up surplus production and support prices.

China steel exports rose by almost one fifth in 2015 to 112 million tons, according to customs data published on Wednesday. That's enough to meet total annual German and Japanese steel demand with room to spare, according to Bloomberg News.

Falling Steel
Europe steelmakers index has lost 30 percent in the past three months
Source: Bloomberg Intelligence

A weakening yuan will make those exports cheaper, as may China's decision in December to cut some export tariffs on domestic steel.

That will add to pressure on European steel makers to restructure or consolidate to confront their own overcapacity problem. As recently as 2013, industry overcapacity in Europe stood at 80 million tonnes, a third of total production for the region. Tata Steel took a first step by cutting 1,200 jobs in Britain last year.

Yet further cuts are likely to be slow due to political sensitivities. Beaten down valuations also provide little incentive for asset sales. Bloomberg Intelligence's Europe Steel Producers Index has slumped about 30 percent in the past three months.

It's little surprise steelmakers are hoping the European Union will erect more trade barriers to protect them against their Chinese counterparts. EU imports of Chinese steel have doubled in the past 18 months, according to Eurofer, the European Steel Association. But it would take time for those measures to take effect, and because they would only apply to imports of particular products, they could be quickly circumvented.

China Steel Imports to the EU Have Surged
For some steel categories, China's EU market share is now as high as 10 percent
Source: Eurofer

In this wintry environment, analysts at Jefferies recommend investors favor companies that are either specialist producers (where competition from Chinese imports is less) or have significant non-steel businesses.

Austria's Voestalpine, which supplies the auto and aerospace industries, and Germany's ThyssenKrupp, which also makes elevators and car parts, fit that bill.

Voestalpine's Ebitda margin is almost 13 percent, compared with 8 percent at ArcelorMittal, Bloomberg data show. ThyssenKrupp's capital goods business (which includes the elevators operation) accounts for more than 70 percent of adjusted operating profit, according to Jefferies.

Those will be handy defenses in a long winter.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Chris Bryant in Frankfurt at

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Edward Evans at