Engineering: Steel – the Market Weak and Declining
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The most notable recent change in the steel industry is the price decline, due to lower consumer demand.
The lower demand has been spurred by the worldwide economic crisis, reducing steel exports and the consumption of steel.
The slowdown in the construction industry has also affected demand. Currently in South Africa, only government spending is creating sizeable demand for steel. Because steel is needed at the beginning of each construction project, and new contracts have slowed down dramatically, future demand is also looking weak. Steel take-up for the 2010 World Cup construction projects is now almost complete.
On the positive side, steel is continuing to be supplied for government projects such as infrastructure contracts and low-cost housing.
As a result of weak demand, steel manufacturers have had to curb production and lay off workers. Some have layed off temporary workers, while others are retrenching full-time staff.
The decline in the steel price has also affected steel suppliers and merchants holding stock. Their steel stock is now valued at about 15% less. This affects profitability, liquidity and puts working capital at risk.
In granting credit to steel buyers, one has to look at the strength of their balance sheet, taking into account that there is the possibility of further steel price decreases. If a buyer had stockpiled in anticipation of a steel price increase, they may be forced to sell stock at below cost.
Some steel merchants are already selling their stock at below cost to earn revenue. Further price decreases could lead to even further losses.
The overseas price of steel has fallen due to the decline of the global economy and especially the dramatic Asian markets decline. If local steel producers do not follow suit with price decreases, it could become cheaper to import steel. On the positive side, the time lag for importing steel could prompt local companies needing quicker delivery to buy locally.
Coface is seeing a growing number of steel buyers with cash flow problems. There are an increasing number of payment arrangements being made with debtors to reschedule debt.
The number of debtor handovers and liquidations have increased. These are tough times for the steel industry. But having said this, the industry is unpredictable. If there is a slight positive turn in the economy, the steel price may stabilise or even increase towards the end of the year.
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