Market Monitor Steel USA 2016

• Increasing imports affect profit margins of US businesses
• Payment delays expected to increase further
• More insolvencies expected in the tubular goods segment

The US steel and metals sector´s revenue performance remains negatively affected by the lower cost of imported steel and decreasing demand from the oil/gas industry, which suffers from the oil price decline. The latter particularly affects the oil country tubular goods (OCTG) sector. Increased demand from construction and automotive sectors will not help US production facilities in the near term, as many manufacturers are buying their metal and steel products offshore. It is expected that the US steel/metals market will continue to see below-average demand, weaker pricing and strong import competition in H2 of 2016.

Profit margins of steel and metals businesses have substantially deteriorated over the last 12 months due to the negative impact that lower import prices has had on the sector, and this negative trend is expected to continue through the end of 2016. The inventory of some businesses is currently stocked at higher prices than they can sell to the market. Competition is increasing, as companies try to expand their regional reach (local to regional, regional to national) in order to find new business and increase revenues and profits.

Financing requirements and gearing are generally high in this industry, and banks have become increasingly reluctant to provide loans to businesses. Steel/metals companies must be financially very viable in order to obtain preferred lending terms and interest rates. Banks with tighter controls will pressure companies to reduce unused credit lines if history shows they are not using the maximum borrowing capacity, this is particularly the case for revolving credit lines.

The average payment duration is 30-45 days domestically and 60-90 days for businesses abroad. Payment delays and defaults have increased and are expected to rise further, as the cash flow of end-buyers has been impacted by lower growth, especially in the OCTG sector. Insolvencies have increased in the OCTG-related segment and are expected to increase further in 2016. Therefore, our underwriting stance remains restrictive for the time being.

We expect to see financial statements of many steel and metals businesses with lower revenues and operating profits and net income at the break-even or loss level. Cash flow is expected to weaken, but many of the larger public-listed companies, having experienced the 2008/2009 downturn, have hoarded cash over the last three years and should be able to survive the current downturn.