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Trade Credit: Sector Update - Metals

Friday, July 2, 2021

Supply and demand have always been the most important factors in any commodity price movement, and that remains the case with metals.

In 2020, as Aerospace, Automotive and Construction demand was heavily impacted by lockdowns in the UK and Europe, steel mills moved to shore up cash and stem losses by taking capacity out of the market through the idling and closing of a number of furnaces and facilities.

The ability of the construction and manufacturing sectors to adapt to new working practices to combat Covid has meant demand has returned relatively quickly. But bringing back steel production is a slower process—you can’t just turn the steel production taps on again overnight.

As a consequence, with caution on future demand weighing on steel producers’ plans and a number of problems associated with various blast furnace restarts, the availability of steel has failed to keep up with the returning demand.

In addition, China (which is, by far, the largest steel producer globally) has had a strong rebound from the initial Covid shutdowns and whilst still producing a record amount of tonnage, the level of demand from domestic manufacturers has also increased. So much so, in fact, that China was, for a period, a net importer of steel in stark contrast to recent pre-Covid times.

The decrease of exports and the continuation of EU safeguards and quotas mirrored by the UK in response to Brexit has resulted in the tightening of steel supply, with lead times from Europe and UK producers increasing and steel availability generally being restricted.

With the lack of availability and such long lead times, we have seen a near doubling in steel prices (more for some products) as service centres and end-users struggle to secure products to maintain sales and forward orders.

This has been a once-in-a-generation period of stock profits for the service centres, which has allowed unprecedented margins to be made as input prices lagged behind sale prices, especially in the spot market. With such a scarcity of products such as cold-rolled coil, the onus has been on securing supply rather than price, allowing higher and higher margins to be agreed upon for those with metal in stock or on the water. This period of high margins has helped to boost businesses’ finances and allowed for a welcomed rebuilding of balance sheet strength and liquidity.

As we move into the second half of 2021, other factors initially caused by Covid lockdowns are impacting the supply chain. As buyer purchasing trends changed, microchip and semiconductor availability are now holding up automotive sectors and production lines as consumer electronics production increases resulting in a slowing of supply to car manufacturers. The SMMT report in May 2021 shows car sales were 22.9 % down for the year and 52.6% down on 2019 levels, and it is frustrating for the sector that production will now be disrupted as consumer demand returns.

UK Automotive Production

 

Source: SMMT

However, this could have a side-benefit in easing steel availability as the large original equipment manufacturers (OEMs) reduce their output, and steel allocations with the big mills are not used or returned for other sectors. Other automotive concerns outside of Covid-19, such as emissions, the rise of electric vehicles and Brexit, remain and will undoubtedly prevent the strong and sustained rebound that would normally be expected at this point.

UK car production continues to be export-led, with 83.6% of all cars built so far in 2021 shipped overseas. The European Union remains the most important destination for British cars accounting for 56% of all exports, the US 18.3% and China 7.3%.

 

Conclusion

Make UK, the manufacturers’ organisation, suggests that manufacturing in the UK as a sector appears to be recovering at a significant rate, outpacing the growth of the economy overall. The growth is coming from both domestic and overseas orders, which is also translating into strong hiring intentions. In addition, investment intentions have also turned positive for the first time since the first quarter of 2020.

Iron ore and scrap prices remain high, while demand remains robust with the Manufacturers Eurozone PMI recently hitting a record level of 63.4; while there may be some decline, we would expect metals prices to remain strong for the rest of the year and into 2022.

While high steel prices have been hugely beneficial to a number of companies in the supply chain, there is a concern this is squeezing manufacturers’ margins and could lead to delays and changes to construction contracts, as steel is either replaced or contractors hold off on new projects for prices to return to more sustainable levels. This is a particular concern for a UK construction sector seeking to benefit from a government infrastructure investment boom.

While the general steel market remains buoyant, Aerospace has remained very difficult for obvious reasons, and all sectors continue to struggle with Brexit practicalities—although import and export volumes show that businesses seem to be progressively making it work.

Availability of labour has been widely reported as a problem for the casual dining and agriculture sectors, but manufacturing suffers similarly. However, the sector has the advantage of continuous investment in automation, and at greater levels than others, so it is very encouraging to see those positive investment intentions again.

It is possible that a trend to shorter and more local supply chains could benefit the sector, and overall, the sector has shown commendable flexibility in the face of a remarkable 18 months. With the above-trend gross domestic product (GDP) growth forecast through 2022, it feels like the sector could be entering a welcome recovery stage.

Written by Tom Bryant, Senior Risk Underwriter – Credit.

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