RiskCredit RiskSteel sector: Maintaining trade credit

Steel sector: Maintaining trade credit

As recent headlines demonstrate, steel producers in Western countries face a range of challenges and the impact extends further to their suppliers. This article outlines how the financial risk can be mitigated.

Business failures in the steel industry have sadly – and all too frequently – hit the headlines in recent years. Plants owned by some of the sector’s biggest names are struggling with the loss of thousands of jobs. In the UK, the industry has been in decline for years. In the 1970s close to 200,000 people were employed directly, but by 2014 this had dropped to less than 20,000. The figure is set to decrease even further in the absence of a buyer for Indian producer Tata Steel’s operations in the UK.

The reasons for the decline are many and various, including a slowing in demand triggered by the post-2008 recession and the strength of the British pound (GBP), while a deluge of cheap Chinese steel has forced the price down and increased competition for British manufacturers to an intolerable degree. The UK’s imports of Chinese steel have grown from 2% of demand in 2011 to 8% last year, and only the toughest can survive.

Heavy industries in the UK have long suffered from their lack of competitiveness against cheaper imports from abroad and that situation is unlikely to improve quickly, if at all. The European Union (EU) can, however, take action against the dumping of steel and the UK government has launched an investigation. The problem is that the results may take between nine and 15 months to emerge. In the meantime, earlier this year it was reported that the UK was blocking proposals by other EU members to tackle the issue of dumping by China.

By contrast, other global competitors appear far more agile and active in maintaining their domestic steel capacity and capability. In the US, where tariffs of up to 236% are imposed on certain imported steel products, the process for reaching a decision on illegal dumping can take less than two months.

Minimising credit risk

While British workers wait and hope that a way can be found to protect its steel industry, there are imminent implications for the remaining steel plants in the UK; for steel stockholders, processors and distributors and for the firms that supply to the wider steel industry. They all, without exception, need to implement measures to protect themselves against financial trading risks.

The Association of British Insurers (ABI) has already said that it will continue to provide trade credit insurance in support of steel manufacturing, indeed it is already delivering £4.5bn (US$6.4bn) worth of cover on credit. But how else can companies in, or supplying to the steel industry, minimise their risks and make decisions about withdrawing, maintaining, or extending lines of credit? Clearly protecting customer receivables is the priority, but increasingly it is important to look beyond the surface to identify those companies with which trading is worth a calculated risk. This is possible – given the right controls, payment performance and the value of the goods or services being sold.

Much depends on individual organisations; what is being supplied and the available profit margins. A finance director (FD) will be less concerned about trading with a high-risk steel firm if the margins on the company’s best-selling goods are between 80% and 100% (rarely-seen admittedly) or stock is already slow moving, is end-of-line or is being made obsolete. Then the right decision for the business could be to continue trading.

The key to navigating a safe course is through identifying and analysing potential risk wherever possible, separating buyers who fall into high-risk, medium-risk and low-risk categories, including payment performance, and cross-referencing these against margins on different product lines to ensure the overall risk is monitored and controlled.

Health check

In this changing environment, companies should be able to demonstrate they can control and analyse their trade credit exposure across all sectors of their business from a consolidated to an individual business position. This kind of analysis should give additional comfort to their stakeholders. While they may not be as flexible about continuing support in an uncertain market, they may be willing to support a ‘risk-management strategy’, based on detailed intelligence on the financial health of a customer or client.

This type of strategy requires more than just tracking days-sales-outstanding (DSO). It is based on extracting detailed intelligence that takes into account the risk of the steel sector in general, and the particular financial health of the customer. It can help track their supply chains and the nature and source of their debts, plus the factors that enable them to pay or make them likely to default on credit. Where supplying to the steel industry is concerned, the intelligence must be up-to-the-minute to ensure decisions are based on current facts. Of course, as well as enabling decisions to be made about which customers to trade with or extend credit to, this type of information can also be leveraged to give comfort to banks and help towards reducing borrowing costs.

Credit risk specialists such as Tinubu Square work with companies on a daily basis, including those in steel and other heavy industries, which are navigating this path between risk and opportunity. They are only too aware of the threat posed to their own company’s financial stability by the uncertainty of the sector, but armed with the right information, they are able to assist the sales drive and make calculated, well-informed decisions. More than anything else this is making them a valuable asset to the business in the most difficult of economic circumstances.

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