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Turbulent waters ahead for the steel and metals industry

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US steel and aluminium import tariffs are yet to directly and significantly impact the world steel market, but uncertainties have increased.

The industry is rebounding in most markets but the strong growth seen in 2017 and, to a lesser extent, 2018, is likely to drop off in 2019 to just 0.7 per cent. 

The European Union has initiated safeguarding and anti-dumping measures to avert low prices and cheap imports, and some steel producers like China, Russia, Turkey, and South Korea have begun to redirect their exports. Furthermore, the outcome of mounting trade disputes will influence prices in 2019. 

Major issues facing the steel and metals industry include overcapacity and susceptibility to political and economic risk factors. This can include increased protectionism, especially as the China-US trade conflict continues to gain momentum, as well as China’s potential hard landing, Brexit, an economic downturn in the EU, and capital outflows from emerging markets. If any of these risks materialise it could contribute to an immediate and serious downturn in global steel demand.

In the United Kingdom, revenues have improved due to higher prices and increases in tonnage sold at acceptable margins. The impact of US tariffs is considered low because most British exports are highly-engineered items which aren’t produced in the US and aren’t easily substitutable, so tariff-related price increases can be passed onto buyers. 

Vulnerable to cheap imports

A hard Brexit could affect the industry because British steel and metals exports could become subject to the EU measures put in place to protect domestic steel. Without protection, the UK steel and metals industry could become vulnerable to cheap imports from Asia and the Middle East. Low overheads make producers resilient to economic changes and bank finance is generally readily available. Encouragingly, the steel and metals sector is not expected to follow the overall trend towards increased insolvencies in the UK.

The US will find some segments damaged by its import tariffs on steel and metal, and major buyer industries are about to be affected by higher prices. There may be a slight risk of increasing insolvencies in 2019.

While the tariffs have made domestically-produced steel and metal products less expensive than imported products, many foreign producers offer specialised products not readily available in the US. This means many businesses will need to pay the additional tariff amount on imported products or higher prices on domestic products without being able to pass those costs onto customers in the short term due to existing contracts. 
The tariff issue could have an adverse impact on the US economy, especially sectors like automotive, construction, and consumer durable goods, as they rely on cheap steel imports.

Strong Chinese demand 

Passing on tariff-related price increases could hurt demand while not doing so could squeeze margins. This means a slight increase in steel and metal insolvencies in 2019 can’t be ruled out.

China is likely to see robust domestic steel and metal demand, supported by increased infrastructure spending. The impact of the trade war with the US has seen businesses redirecting imports to other regions but longer-lasting tariffs or an escalation of the trade conflict would harm the industry.

Profit margins are low and, while there is plenty of access to finance for state-run businesses, government support can’t be taken for granted. The industry has a poor credit risk rating, with businesses advised to transact only with Chinese businesses with strong financial profiles or backgrounds.

To help you assess the credit worthiness of a potential buyer talk to a trade credit insurance provider. Taking out a policy with them can also help protect your cashflow if the buyer cannot pay. 

Mark Hoppe is managing director, Oceania, Atradius, a global risk management and credit insurance specialist  www.atradius.com.au

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