Payment delays and defaults have started to increase in the industry
In 2021 and early 2022 the industry recorded solid pent-up demand, but supply bottlenecks remained an issue. Metals and steel sales prices sharply increased in 2021 and in Q1 of 2022, peaking immediately after Russia´s invasion of Ukraine in February. The price surge has driven up margins of many steel stockholders and service centers, which were able to buy in at low cost and then sell on at higher prices. Many businesses have used this opportunity to deleverage, considerably improving their balance sheets.
At the same time, however, the sharp energy and commodity price acceleration has affected some metal and steel manufacturers who have not been able to pass-on hiked input costs. In particular, many businesses supplying the construction industry (e.g. with structural steel) hold fixed contracts, and the lack of flexibility to pass on price increases has hampered profit margins.
Currently, metals and steel output and sales are increasingly affected by a more sluggish economic performance, with persistently high inflation and interest rate increases weighing on activity. UK industrial production is expected to slow down to 2% in 2022, and to 0.6% in 2023. Metals and steel businesses dependent on automotive and aerospace face lower demand and project deferrals caused by supply chain issues. While fiscal stimulus sustains infrastructure and residential building, high input costs should trigger a slowdown of construction activity in H2 of 2022 and into 2023.
Payments in the industry take 90 days on average. Payment delays and defaults have started to increase, and this adverse trend will continue in the coming months. Credit risk has increased for smaller downstream businesses who face competitive undercutting on pricing, while facing higher overhead costs. Deteriorating demand leaves many service centers heavily stocked and vulnerable to further devaluation. Business failures could increase by about 30% year-on-year in the coming twelve months, but this surge is from historically low numbers recorded in 2020 and in 2021, caused by insolvency moratoriums and massive fiscal support.
Our underwriting stance is generally open for the non-ferrous metals subsector, while being neutral for iron and steel. We are restrictive regarding the casting and metals manufacturing segments.