In its latest report on the steel sector, credit trade insurer, Atradius (www.atradius.co.uk) warns that rising costs and squeezed margins is continues to drive a deterioration in profits, and is forecasts that insolvencies in the sector are expected to rise by 5% in 2020.
Energy costs for British steel producers – which are between 50 to 100% more than in Germany and France – are a major competitive disadvantage. Compounding this, businesses are also facing higher commodity costs, lower sales prices for steel, due in part to historic stockpiling and exacerbated by Brexit-related uncertainty, alongside fierce competition. As a result, Atradius reports steel value added growth is expected to have levelled off in 2019 and to contract 1% in 2020.
Atradius’ analysis shows that the average payment period for the UK steel and metals industry is now close to 60 days with squeezed margins leading to increasing payment delays. These delays are forecast to rise further in the coming 12 months with an increase in insolvencies of 5% in 2020.
Despite relative stability in demand in the steel sector, a slowing performance of other industries such as construction is taking its toll.
Although Brexit remains a concern for the industry, there is potential for an increase in consolidation within the industry and there has been an increase in interest from larger mills in acquiring more downstream businesses in order to support vertical integration. However, there is a risk this could put pressure on independent service centres, as stockists associated with mills will receive preferential prices for their products, notes the report..
“Looking forward, the challenge for service centres and stockholders is to maintain decent margins against price volatility. While falling prices are for the most part endemic, a rise in Q1 2020 is possible. Of course, sustained uncertainty largely created by Brexit has not made a solid foundation for the industry or indeed the wider economy,” says Christopher Wall, Senior Sector Analyst at Atradius.
“It remains important for businesses trading within the sector to take the necessary precautions to mitigate against the inevitable risks. This includes maintaining a steady flow of quality information both on the wider industry and individual customers and reacting promptly to any deterioration in payment trends. Alongside this, forward planning and building strong relationships with trusted partners is key. A proactive and robust approach to risk management remains essential,” comments Wall.