Five questions on the German steel industry

How has the german steel sector performed in the last six months?

The steel sector was among the industries hardest hit by the economic crisis in 2009. With its high dependence on the ailing automotive, construction and machinery industries, steel turnover deteriorated sharply last year to a level not seen for five years. However, the industry began to recover in the second half of 2009 and, between January and June this year, crude steel production has increased 64.4% year-on-year. Nevertheless, the sectors situation remains difficult and prone to downside risks, because of sharp increases in commodity prices, higher risks on the financial markets and the still shaky general economic climate.   

What is the current trend in payment delays, payment defaults and insolvencies?

Crédito y Caución has noted a slight improvement in payment behaviour generally, and decreased payments defaults since the start of the year. However, Germanys ongoing economic recovery is only partly reflected in the current insolvency figures. The first wave of business failures hit manufacturing - especially machinery and automotive suppliers - in 2009. But, as the recovery has proceeded only slowly in recent months, a second wave of failures has affected service providers and steel traders. Wholesale scrap metal, iron and recycling material also registered considerable increases in insolvency in the first half of this year.

What should companies selling products into the german steel sector pay particular attention to?

As well as taking into account the size and age of their buyers, suppliers should look closely at their payment behaviour and compliance with agreed payment terms. They should also insist on the inclusion of a retention of title clause in their sale contracts. Because of the continuing volatility of commodities prices (including scrap) steel companies still face the risk of high liquidity pressures due to high purchase prices, windfall losses, and depreciating inventory in the event of sharply decreasing prices. It would be advisable therefore to keep contractual terms fairly short.

What is Crédito y Caucións short term outlook for the german steel sector?

After a positive start to 2010, Crédito y Caución expects a continuing stabilisation of the sector in the second half of the year, although pre-crisis production levels will not be reached again before 2012 or 2013. The steel industry currently profits from a resurgence in sectors such as automotive and machinery, both of which registered rising exports in the first half of 2010, supported by the weaker euro exchange rate against the US dollar.

However, due to the still fragile global economy, and the widely differing forecasts of future steel prices, it is hard to predict the sectors turnover and profitability in the second half of the year. Another relevant factor is that of the commodity markets, and especially the growing concentration on the suppliers´ side and the involvement of venture capital. This has already led to rising iron ore and related material prices and subsequently to increased steel production costs, which will be hard to fully pass on to customers. Therefore the steel industry and its major players still require to be carefully monitored.