The level of protracted payments in the steel sector is high due to fierce competition, persistent pressure on margins and risky trading conditions.
- In Singapore construction accounts for 80% of steel consumption. Steel demand increased 5% year-on-year in 2015, to around 4 million tonnes. In early 2016, demand increased further due to the fact that in Q1 of 2016 construction was the best-performing GDP component, as building activity expanded 6.2%, thanks to increased public and private sector construction activities.
- Singapore is a net importer of steel due to the lack of upstream players. Almost all steel businesses in Singapore are traders and wholesalers, who either import steel and sell it locally or re-export from/to other countries.
- While the current upswing benefits domestic steel traders and wholesalers, the market situation in the segment remains difficult due to a fiercely competitive environment, which puts persistent pressure on (already thin) margins. Given the long trade cycle, external funding demand is very high for businesses in order to stay liquid. However, given the elavated risk situation in this sector due to very thin margins and price volatility, banks are generally unwilling to provide loans.
- Payments in the industry take between 60 days and 120 days. The level of protracted payments is high due to fierce competition and risky trading conditions. While steel insolvencies are expected to decrease in H2 of 2016 by 2%-3% due to the currently higher demand for steel in Singapore, our underwriting stance remains cautious because of the structurally weak market conditions in this sector and the on-going volatility in the global steel market. That said, our underwriting stance for the metal producers segment is more open, given the positive performance outlook and the fact that there are just a few long established players with a good reputation in the market.