The tubular goods segment is hit hard by the end of the oil boom, with insolvencies expected to increase.
- Increased imports affect profit margins of US businesses
- Payment delays expected to increase
- More insolvencies expected in the tubular goods segment
Currently the US steel and metals sector´s revenue performance is negatively affected by the lower cost of imported steel and decreasing demand from the construction industry and the oil/gas industry, which suffers from the oil price decline. The latter particularly affects the oil country tubular goods (OCTG) sector.
Profit margins of steel and metals businesses have decreased over the last 12 months due to the negative impact lower import pricing has had on the sector, and this declining trend is expected to continue through the end of 2015. The inventory of some businesses is currently stocked at higher pricing 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. While banks are generally not opposed to providing loans, they now demand more security for their debt structure or limit asset based lending (ABL) agreements to lower borrowing bases. Steel/metals companies must be financially very viable in order to obtain preferred lending terms and interest rates.
We continue to see the metals service centres as ultimately controlling the industry. Back in the early 2000s, many of these companies were hit hard by overstocking of inventory and suffered years of minimal profits and/or losses. Today, they typically keep their inventory levels within 60-90 days of supply, with many placing orders on a ‘just-in-time’ basis in order to keep overhead costs at a minimum. It also allows them to manage purchase costs with end-market sales pricing, providing for more stable financial results. Profit margins for these companies have been generally stable between 3% and 5% over the last few years and we expect this trend to continue, with the exception of businesses affected by downturns in the oil-and-gas exploration sectors.
The average payment duration is 30 - 45 days domestically and 60 - 90 days for businesses aboard. 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 and construction sectors. Insolvencies have increased in the OCTG-related segment and are expected to increase further in 2015, by about 10% - 15%.
Our underwriting stance remains neutral for the time being. Abundant information on buyers (company and payment history) and financial information is required. Regarding subsectors, we are currently restrictive on OCTG and aluminium/copper related businesses, as in the latter segment high price volatility has affected the ability of producers/suppliers to pass on production costs to end-buyers.
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