The steel sector remains severely impacted by the ongoing domestic economic downturn, high interest rates, inflation, and exchange rate volatility.
- The steel and metals sector remains severely impacted by the economic downturn (Brazil’s GDP is expected to contract 3.4% in 2016 after shrinking 3.8% in 2015). The Brazilian business environment has deteriorated while interest rates, inflation and exchange rate volatility remain high.
- In the domestic market steel and metals mainly suffer from a massive decrease in public and private investment, especially in the major buyer industries construction and oil/gas. At the same time, exports are hampered by steel oversupply in the global market and the low competitiveness of many Brazilian businesses, even with a depreciated currency.
- Steel and metals is a sector highly dependent on bank financing, with many businesses highly indebted. Serving those debts has become increasingly difficult, mainly due to higher interest rates and the fact that banks are unwilling to provide new credit.
- Next to demand, profit margins have deteriorated over the last 12 months and are expected to further decline in the coming six months. Many businesses have to accept lower margins in order to preserve sales volumes.
- Payment behaviour in the steel and metals sector is bad, as non-payments have increased in 2015 and H1 of 2016. Due to the credit crunch generated by high interest rates many businesses are stretching their payment terms. Insolvencies of steel and metal businesses have sharply increased, and a further rise in business failures is expected in the coming months.
- Due to increasing credit insurance claims, the deteriorated business performance and increased credit risk, our underwriting stance is currently restrictive for all steel and metals subsectors.
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Market Monitor Steel September 2016
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