Gas supply is the key issue
The German metals and steel sector rebounded in 2021 and early 2022, due to a high amount of orders from key buyer industries as well as the domestic economic recovery. However, supply chain bottlenecks and shortage of raw materials dampened a stronger rebound of the industry. Most metals and steel producers have been able to pass on higher commodity prices to their buyers, with the notable exception of suppliers to the automotive industry. Profit margins of most businesses in the metals and steel sector improved in 2021 and in Q1 of 2022.
Due to the economic repercussions of the war in Ukraine, the industry is currently facing several challenges. Increased uncertainty and supply chain issues in the manufacturing sector are likely to weigh on investment spending and dampen metals and steel output this year, forecast to contract 1.6%.
Most metals and steel producers have been able to pass on a large share of high energy (gas) prices to their customers. The sharply increased costs, however, have begun to burden metals and steel businesses´ performance and results, in particular affecting companies with already restrained liquidity. Producers are cutting back output and reducing inventory. Due to the combination of weakening demand and persistent global overcapacities in the steel segment, wholesalers could get in troubles due to high levels of stocks, probably facing depreciations towards the end of the year.
Payments take 30-45 days on average but can last up to 90 days in some cases. Payment behavior in the industry has been good during the past two years. However, due to the current major issues (supply bottlenecks, high energy prices, and economic slowdown in Germany and the Eurozone) we expect that both payment delays and business failures will increase in the coming twelve months, back to “normal” levels seen prior to the pandemic.
Should Russia sharply reduce or even stop gas supplies, the impact on the sector´s credit risk would be serious, probably leading to a high number of defaults. In such a scenario, we would expect metals and steel output to contract by 2% in 2022 and 1.7% in 2023. For the time being, our underwriting stance is still open to neutral for the steel, non-ferrous metals and metal manufacturing segments. However, we are more cautious for casting businesses due to the burden of high energy costs.