Optimism in UK metals sector - Atradius report

The British steel and metals industry faces an optimistic start to 2016 following a volatile year, according to an in-depth sector report by trade credit insurer Atradius. The Market Monitor research report by Atradius analyses economic performance in the sector, giving businesses an insight into trading conditions as well as potential risks and opportunities within the steel and metals industries.

On a global level, steel use is expected to have increased by only 0.5% in 2015 following a subdued growth rate of 0.6% in 2014. The economic slowdown in China, the world’s largest producer and consumer of steel, is considered the main reason behind these numbers; with further falls in Chinese demand forecast over the next year. At the same time, Chinese exports have been increasing, driving lower prices and reduced earnings for many steel businesses globally. The Market Monitor reveals that overcapacity is an increasing issue for many steel producers and traders. Despite lower iron ore prices, companies face a fiercely competitive global environment and persistent pressure on steel prices is hindering profitability and affecting profit margins. The liquidation of SSI and the consequent mothballing of the Redcar plant is a clear reminder of on-going challenges for the sector In the UK, the report found that the steel and metals industry has generally benefited from the wider economic rebound. However, more recently the subdued performance of the construction sector has had an impact. In addition, exchange rate volatility, high energy costs, competition and on-going austerity measures all continue to put pressure on the performance and financial strength of steel and metals businesses. Simon Rockett, Senior Risk manager at Atradius, said: “After a challenging start to 2015, the outlook for the British steel and metals industry continues to be volatile. Uncertainty arising from Eurozone austerity and further slowing of Chinese growth remain constant risk factors. “Lower prices and overcapacity have impaired revenues and margins for many businesses. Consequently, in a bid to mitigate liquidity risks, cost-cutting programmes have been implemented with inventories being unwound and non-core assets disposed of. However, whilst we are seeing cost containment measures as a response to overcapacity this may be just a short-term remedy. Maintaining margins through cost reduction and focusing on high-end products should not be seen as an ultimate solution to structural problems. That said, many businesses have already invested in new technologies, such as laser cutting and detailed integrity scanners, in order to gain competitive advantages as the ability of a business to process products efficiently is a major asset. “Looking further ahead into early 2016, there is some optimism that sector performance will improve on the back of increasing volumes. Expected growth in the non-residential building and infrastructure segments should help the sector. At this stage, access to additional financing will be key for the growth of businesses in order to re-stock and meet the anticipated rise in demand.” Analysing payment behaviours, the Market Monitor found that the average payment duration in the UK industry is 60 days and despite current challenges, payment delays are not currently predicted to increase. Furthermore, insolvency levels are not expected to rise in 2015 as the volume of UK steel consumption is still rising. Rockett continued: “While there is some optimism for the UK metals market, we advise businesses to take a cautious approach as the sector is still fragile which can lead to unexpected failures. “Atradius has a comprehensive understanding of the sector and the prevailing issues. We have also developed close working relationships with many of the buyers in our portfolio enabling us to make better-informed credit decisions and to support businesses to trade within the sector.”

#CREDITRISK