Market Monitor Steel France September 2016

A high level of competition, overcapacity and persistent low prices continue to affect revenues and margins of smaller French steel/metals traders.

The French steel and metals sector benefits from increased demand from automotive and from what appears to be the bottoming out of the slump in the construction sector. The French steel and metals trading segment is highly concentrated, with about two thirds of market share owned by trading subsidiaries of steel majors (Arcelor, Riva) or independent large groups.

The high level of competition (domestic and foreign), overcapacity and persistent low prices continue to affect revenues and margins, especially of smaller steel/metals traders, wholesalers and processors. However, many smaller businesses are able to provide added value or are operating in niche segments that provide higher margins.

Steel businesses are generally highly dependent on bank finance, either due to high capital expenditure when operating upstream and/or the need for short-term facilities to finance working capital requirements and inventories. Currently, the willingness of banks to provide credit to the sector can be described as neutral.

Payment delays are not expected to increase in H2 of 2016, and the level of steel/metals insolvencies is not overly high. This is mainly because many steel and metals traders and wholesalers are able to adapt with a flexible cost structure. That said, the foundry segment and steel and metals businesses that are dependent on the oil and gas industry as their end-market currently face difficulties.

Our underwriting approach remains neutral for the time being. However, conditions can change quickly in this industry, especially if decreasing revenues and margins are not bolstered on time by prudent cost management. Our underwriting strategy therefore takes into account the sector trends as well as the intrinsic financial situation of each buyer and potential support from lenders. We pay specific attention to receivables, inventories, and structural flexibility (supply network rationalization, diversification efforts, adaptation of business models from pure trading towards processing activity order to increase added value and therefore margins).

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