Lower demand coupled with decreasing sales prices and higher prices for iron ore have led to deteriorating margins of steel producers and distributors.
The export orientation of the Spanish metals and steel industry is high, with about 60% of its steel exports destined for the EU. Within the EU market, main buyer industries are building and infrastructure (51%), mechanical equipment (15%), and automotive (12%). Demand from all those sectors has recently started to decrease, especially from automotive.
At the same time, the general downturn in global manufacturing activity is negatively impacting the Spanish steel industry, which recorded decreasing exports in H1 of 2019, while Spanish steel production levelled off year-on-year. Spanish steel value added growth is expected to contract in 2019 and 2020.
As elsewhere, lower demand coupled with decreasing sales prices and higher prices for iron ore have led to deteriorating margins of steel manufacturers, service centres and distributors, and the deterioration is expected to continue over the coming 12 months. The competitiveness of the domestic metals and steel industries remains negatively impacted by power costs, which are about 30%-50% higher than in France or Germany. This is of major importance for the sector, given that 75% of Spanish steel producers work with electric furnaces.
While the risk of further decreasing steel prices remains due to surplus exports from producers outside the EU, Brussels has recently imposed additional safeguard measures to further contain steel imports. However, despite some protection against imports from countries like China, Russia and Turkey the issue of lower demand in Spain and elsewhere in Europe remains.
Payment experience has been good over the past two years, and both payment delays and insolvencies remained stable in 2018 and H1 2019. Neither are expected to increase significantly in the coming months. Despite the ongoing deterioration of businesses’ profit margins, we expect the number of steel insolvencies to level off in 2020.
Our underwriting stance for the steel sector remains neutral to cautious due to the potential downside risks (further escalation of trade disputes, a eurozone recession, and sharply decreasing demand from major buyer industries like automotive). We continue to closely monitor businesses that are vulnerable to US import tariffs and price fluctuations.