Metals recovery hangs in the balance

Market Monitor

  • United Kingdom,
  • Ireland
  • Food,
  • Machines/Engineering,
  • Construction,
  • Financial Services,
  • Steel,
  • Metals,
  • Automotive/Transport

20th June 2023

Nicola Harris, Senior Underwriter to the UK Transport and Metals sectors at Atradius, considers the challenges facing metal and steel manufacturers.

Even by the standards of the tumultuous last few years, metal and steel manufacturers have been weathering some challenging conditions in recent months. 

This is reflected in new statistics on insolvencies in the sector; 265 metal companies in England and Wales went insolvent in the 12 months to March 2023, up by 27% compared with the previous year, according to government figures. 

The majority of failures were in metal fabrication, including 77 within the structural fabrication subsector and 44 in treatment and coating.

Recent high profile failures we’ve seen include West Midlands-based Aartee Bright Bar, victim of the challenging economic environment and fluctuating steel prices. Stockholder Barrett Steel has since agreed a buyout with administrators.

Others have warned of the impact of uncertainty. For example, Tata Steel announced in May that its UK business faced "material uncertainty”, as earnings at Tata Steel Europe had fallen by more than 60% in a year.

Pipelines desap

High energy costs and strikes

There are plenty more examples in what continues to be a tough environment - and high energy costs continue to be among the biggest challenges, despite the help provided by the Energy Bill Discount Scheme (EBDS). The UK consistently has some of the highest industrial electricity prices in Europe; added levies and carbon costs mean UK steel manufacturers pay 60% more for electricity than their counterparts in the EU, according to UK Steel. 

Earlier this year, the UK Government announced plans for renewable levies, capacity charges and network costs to alleviate energy cost burdens for metal producers and improve competitiveness, but UK Steel says regulations may not all take effect until 2025.

Strike action - typically among upstream transport suppliers - has also been adding to input costs, while rising borrowing costs are adding pressure to those firms carrying heavier debt obligations post-pandemic.


Waiting for a recovery in demand

Meanwhile, demand remains stagnant. Among the largest end users of metals, the UK construction industry is burdened with £300m of bad debt, according to Red Flag Alert, which warned that 100 firms a week could go bust this year. In automotive, while production grew 6% in Q1, that comes after a 9.8% decline in 2022. While the outlook is starting to look brighter for car makers, there are concerns about the threat posed to electric vehicle production by upcoming new rules on where parts are sourced from.

Other broader pressures on demand include the likes of China, where growth has been slower than expected, reducing global consumption and pushing down outsell prices.

Supply side volatility is taking a toll too. There is limited supply in the current market and numerous mill shutdowns planned for the summer months will remove further capacity from the European markets.

The closures and reductions in operating hours we saw in 2022 have been exacerbated by more recent unplanned stoppages and selected closures of unprofitable operations throughout the UK and Europe. High profile examples include the closure of the Azovstal steel plant in Mariupol, Ukraine, after Russian forces seized it in May 2022; and the impact of the earthquakes that devastated Turkey in early February on steel production in the country. Other examples include Tata Steel Netherlands force majeure at Ijmuiden because of difficulties upgrading its cold-rolled mill.

There are plenty more recent examples, the impact being longer lead times from domestic and European suppliers, making imports from further afield - such as Korea or Taiwan - more attractive. Prices have been held up by the subsequent reduced capacity rather than real-world demand.

Factory robotics

Expansion, new tech and stronger supply chains

Metal producers are doing what they can to protect themselves. This includes expansion into new markets, such as lithium, to capitalise on the transition to electric vehicles. Others are adopting new technologies like automation, machine learning, and robotics to reduce operational cost and increase efficiencies. Timely refinancing and building a more resilient supply chain - with contingency plans in place - are among other strategies we see.

Ultimately, even as supply normalises, market returns will hinge on the recovery of underlying demand which is likely to prove challenging against the backdrop of a global recession.

In an industry where insolvencies are rising, it’s more important than ever that companies protect themselves with trade credit insurance, to be able to trade with confidence.


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