Increasing insolvencies – but from a historically low level
The economic performance in the Eurozone and in Belgium has worsened due to the impact of the war in Ukraine, and we expect Belgian industrial production to contract by more than 3% this year, while construction output should level off. This will negatively affect domestic demand of metals and steel from key buyer industries, with the notable exception of heating pumps and the solar producing sector. Metals and steel output is forecast to grow by only 2.1% in 2022 after a 2.5% contraction last year.
Other factors with an adverse impact on metals and steel performance include ongoing supply chain issues and elevated prices for raw materials, transport and energy (gas). Labour costs are also increasing due to a lack of skilled staff and the automatic wage indexation in times of high inflation. Passing on higher input costs (in particular for energy) to end-buyers is difficult in the current market environment, and therefore pressure on the margins of metals and steel businesses´ is rising. High gas prices, though, have accelerated the transition towards more efficient use of energy and production processes.
Payments in the Belgian metals and steel industry take 90 days on average, and payment behavior in the sector has been good during the past two years. Due to deteriorating margins and lower demand, we observe an increase in both payment delays and business failures, although from a historically low level seen in 2020 and in 2021, when pandemic-related fiscal support sustained all industries. We see a higher risk of business failures for metals and steel companies dependent on construction and transport – because both sectors currently record insolvency numbers above average. We expect a 30% increase in metals and steel insolvencies after double-digit decreases in 2020 and in 2021.
Our underwriting stance remains open to neutral for metals and steel for the time being, as the expected increase in payment delays and insolvencies starts from a very low level, returning to “normal” numbers seen prior to the pandemic. However, persistently high prices for energy due to a longer-lasting war in Ukraine and an advanced economic recession in the Eurozone remain downside risks for the outlook. In such a scenario, metals and steel output could contract by more than 3% in 2023.