After a tumultuous few years, optimism in the UK steel industry is on the up. Buoyed by rising prices and global economic growth, the outlook for UK steel producers and stock holders is positive.
However, the current recovery is fragile and trade credit insurance has a key part to play in the industry’s reboot. Brexit and concerns over lacklustre economic growth in the UK coupled with recent announcement of US tariffs are creating uncertainty around future demand and prices for steel.
Three years ago, the UK steel industry was in the midst of a crisis as it faced a perfect storm, with prices in the international market falling at a time of increased costs at home. Alongside this weak global economic growth following the financial crisis resulted in a glut of steel and falling commodity prices with dire consequences for prices forcing prices to a 12 year low in 2015.
The UK is a relatively small player in the international steel market and therefore particularly vulnerable to global trends. As a result, economic output from the UK steel industry declined 40% in the two year period 2015/16.
Three years on from the dark days of 2015, the outlook for UK steel is more positive.
The global glut in steel production seen in recent years continues, but is beginning to ease. The global economy is growing, which should generate increased demand for steel, while China has vowed to cut production, closing inefficient and polluting mills. According to the head of the mission of the People’s Republic of China to the European Union, China has already cut steel capacity by over 115 million tons since 2016 and eliminated an additional 140 million tons of substandard steel capacity.
As a result, the price of steel has doubled in the past year.
The UK steel industry has also emerged from the 2015 crisis in much better shape, with the effect of price increases now starting to benefit producers’ bottom line. Following the shakeout of the sector in 2015 and 2016, a number of UK steel works have found a new lease of life under new ownership. There are also signs of increased confidence in UK steel, with producers investing in new processes and products.
UK steel companies have become more competitive, in part due to the lower sterling exchange rate following the EU referendum. The country’s steel producers are also much leaner, having cut costs in recent years, while some producers have shifted their focus from commodity-grade steel towards more valuable products.
A recent government report identified “enormous potential” for the UK steel industry if it can meet growing domestic demand, mostly from planned infrastructure projects such as High Speed 2 and the construction of Hinkley Point C. The study predicts that UK demand for steel is set to rise to 11m tonnes a year by 2030, presenting the industry with a £3.8bn a year growth opportunity.
Despite the rosier outlook for UK steel, the sector continues to face a number of significant challenges and uncertainties. Demand and price volatility remain a major concern, while political factors like Brexit and the threat of a trade war also hang over the industry.
Sharp changes in the price of steel are a key driver for credit risk in the steel sector. The steel supply chain requires companies to plan many months ahead, so swings in the price of steel can leave companies holding stock worth less than they paid for it, or buyers unable to pay for orders made months in advance.
The UK steel industry is a net importer of steel, and much of its domestic production is for local consumption, mostly in key sectors like construction and manufacturing. As a result, UK steel is at the mercy of domestic demand and tied to UK economic prosperity.
With Brexit looming, the outlook for the UK economy is uncertain. GDP growth slowed to 0.1% in the first quarter, leading the Bank of England to lower its forecast to 1.4% for the year. Consumer confidence is waning. Sentiment fell in April as household concern for their finances increased while sales of new cars fell 18% in the first three months of 2018, having fallen almost 6% in 2017. The construction industry also saw activity reduce in the first three months of 2018.
In May 2018, the US imposed a 25% tariff on steel imports and a 10% tariff on aluminium imports as the country looks to protect US producers after initialy exempting the EU. Separately, the US has also announced sanctions on Russian aluminium producer Rusal, resulting in a spike in international prices.
Its early days but the implementation of tariffs could have significant implications for the UK steel industry. A trade war could depress the global price of steel and increase competition from foreign imports as Chinese and EU steel previously destined for the US is redirected.
Brexit could also be a significant factor, raising important questions around the UK’s future trading relationship with the EU. Brexit creates uncertainty around future tariffs and trade arrangements, as well as having implications for state aid rules and foreign exchange rates.
Steel producers and stock holders have to anticipate demand and prices months in advance of delivery. However, flat-lining consumer demand and Brexit, as well as the threat of a trade war, make such predictions more uncertain. At the same time, if they are to capitalise on growth opportunities they will need to finance lines of credit extended to customers.
These factors are likely to support continued strong demand for trade credit insurance from the steel sector, already one of the largest buyers of credit insurance in the UK market.
Smaller and mid-sized steel producers and stock holders are particularly vulnerable to price volatility and sudden changes in demand. Some of our UK clients have already expressed concern around uncertainty for demand and prices towards the end of 2018 and are looking to manage potential volatility into 2019.
Since the 2015 crisis, we have seen an increased transparency in the steel industry, with a greater willingness to share data and engage in dialogue. QBE’s expertise in this sector and access to proprietary information helps our clients manage their credit exposures in these uncertain times and hopefully towards a much brighter future for UK steel.