Only a slight increase in business failures expected
After a dynamic performance in H2 of 2021 and in Q1 of 2022, demand for metals and steel has slowed down. Automotive is struggling with lower demand and production issues, while construction activity slows down due high raw material prices and project delays. That said, demand from aircraft construction is robust, which mainly benefits aluminium producers and wholesalers.
In 2021 and early 2022 metals and steel businesses have been able to pass on higher commodity and energy costs, because limited supply forced buyers to accept price increases. This has led to higher margins, in particular for metals and steel traders. With sharply increased oil and gas prices after Russia´s invasion in Ukraine, the French state has taken measures (caps and subsidies) to curb energy prices for business and consumers alike. However, despite this support, lower demand should trigger metals and steel businesses´ margins to deteriorate in the coming twelve months. After a peak in March, sales prices have significantly decreased, resulting in working capital requirement issues for traders who need to manage inventories.
Payments in the French metals and steel industry take 60 days on average, and the number of payment delays and insolvencies has been very low in 2021 and H1 of 2022, due to pandemic-related state support. We expect that business failures will increase in the coming months by about 4%-6%, as they return to “normal levels” seen prior to the pandemic. Smaller metal manufacturers with deteriorating margins are likely to be most affected because they have more difficulties than their larger peers in passing on price increases. Default risk is also higher for businesses that face issues in financing their working capital requirements in times of lower demand and the expiry of Covid-related state-backed loans.
Despite more challenges ahead, our underwriting stance is in general neutral for steel and metals, as the industry is historically resilient, state support continues, and we expect no major increase in payment defaults and business failures. We are open for the iron and steel and the non-ferrous metals segment, the latter benefitting from the rebound in the aircraft industry. We remain restrictive for the casting subsector, which traditionally shows weaknesses like thin margins and strong competition.