Financially resilient businesses, but downside risks loom
In 2021 and in January-April of 2022 metals and steel sector output and sales grew strongly, with elevated sales prices and historically high profits. This was due to pent-up demand after the height of the pandemic, followed by sharply increased purchases immediately after Russia´s invasion in Ukraine. However, metals and steel demand has slowed down since then, due to high stocks held by many customers and less orders, in particular from automotive and residential construction. This will make it more difficult to pass on higher input costs in the coming months, leading to decreasing margins. The decrease in steel prices since May will force distributors to sell off inventory at prices below purchase rates.
Payments in the industry take 60 days on average, and payment behavior has very been good during the past 18 months, because customers had to pay promptly in times of high demand and limited supply. After the very low levels seen during the past twelve months, we expect both payment delays and insolvencies to increase as demand shrinks, metals and steel prices decline, and fiscal support schemes have expired. However, we do not expect a severe credit risk deterioration, because many businesses in the industry are financially resilient after almost two years of robust growth and high profits. Additionally, sufficient gas supply does not seem to be an issue, despite the stop of Russian supplies to Poland in April. Our underwriting stance is neutral across all major subsectors, due to the current mix of strengths (businesses´ financial situation) and weaknesses (decreasing demand, high energy prices).
That said, there are downside risks, which could lead to higher insolvencies numbers than currently expected. One would be a serious deterioration of German buyers as a major customer segment. Another would be sharp monetary tightening by the Polish Central Bank in order to curb inflation. A third potential setback would be a delay in payments from the EU recovery funds, because of an ongoing dispute between the European Commission and the Polish government about rule-of-law issues. This would affect the economic recovery and infrastructure construction, the largest buyer of steel in the Polish market.