The U.S. Steel Industry Strengthens, Credit Conditions Improve

2016 Bankruptcy Risk for the U.S. Steel Industry: Credit Conditions Improves

We can all use some good news once in awhile, and today, we’ve got some good news to share with our credit and supply chain friends.

There have been some very positive developments in the U.S. steel industry, and credit conditions have improved. Companies that were looking very risky just a few months back are looking much improved.

Here’s what has changed, and how to get ahead of your steel industry counterparty risks going forward:

Return to Growth, Signs of Recovery

After a period of major challenges, there are some very positive developments for the domestic steel industry:

  • GDP for the U.S. grew at a faster rate in Q3, and both the Credit Managers Index and ISM Manufacturing Index continued to improve in November.
  • U.S. trade laws are being enforced more aggressively, to keep Chinese producers and others from circumventing them.
  • There's an expectation that a Trump presidency will be more supportive of steel fundamentals, with more protectionist policies resulting in less competition from cheap steel imports.
  • There's an expectation of renewed infrastructure spending, beginning in 2017.
  • Recent price hikes will boost profit margins, and offset rising raw material prices.
  • There are further improvements to industry pricing and capacity utilization expected, according to Moody’s, and noted in this recent NACM article.  
     

Other recent industry trends to note:

  • US steel industry fundamentals continue to strengthen, in terms of re-start, re-roll and operating hour metrics. Of note, US mini-mill operators have successfully pushed through 4 price hikes in a span of 40 days, practically unprecedented in the domestic US steel market dating back to 1950.
  • US scrap prices are forecast to increase an incremental $35-45/per ton, owing to seasonal demand, hoarding and Asian import price increases that "stuck" earlier in 2016.
  • Higher oil and spot natural gas pricing is leading to improved exploration and drilling activity in the US, both onshore and offshore (in the Gulf). Exploration and Production companies are traditionally large end-users of tubular steel. Rig count restarts, daily utilizations and rising steel intensity per rig are factors supporting "inflection point" type changes in market variables.
     

Credit Conditions Improve, and So Does Bankruptcy Risk

Due to these positive developments, we’ve seen a reduction in bankruptcy risk for all the sub-sectors that comprise the steel industry.

The FRISK® Stress Index for SIC code 331, for instance, shows a big drop in bankruptcy risk for the Steel Works and Finishing Mills sub-sector. This index is an industry-wide bankruptcy risk score that factors in components such as financial ratios, agency ratings, and market data, and more. Many individual companies in the sector have improved markedly over the past 9-12 months.

2016 Bankruptcy Risk for the U.S. Steel Industry: Credit Conditions Improves

Despite Improvements, Challenges Remain

Despite the improving FRISK® score trend, the industry isn’t completely out of the woods yet.

Last year saw the bankruptcy of Columbus Steel Castings, Metropolitan Steel, Warren Steel Holdings, KLN Steel, Essar Steel, and others. There are still many risky steel companies out there -- especially beyond our borders -- experiencing financial stress.

In fact, about a third of the FRISK® scored companies in this industry are still in the red zone -- especially foreign steel producers in Asia, Europe, Australia and elsewhere. That's why despite improving fundamentals, steel company financial risk should be watched closely, especially in the FRISK® score ‘red zone’.

The loss of a big customer, higher interest rates, a strong dollar, and trade policy could cause the risks profile of a key customer or supplier to change quickly.

How Good Is Your Bankruptcy Radar?

Making daily credit decisions without a reliable and up-to-the-minute financial risk score is like predicting a storm without radar.

Here’s how to up your game:

  • For all of YOUR counterparties, use a reliable financial risk score to assess and track risks over time.
  • Use a monitoring service that sends ‘risk alerts’ when there are new financial developments, to stay up to date.
  • Take advantage of our free, personalized risk assessment of your company credit portfolio. It’s the best way to learn your true financial risks, before it’s too late.
     

You can’t afford to be blindsided by financial risk, whether in the steel industry or beyond. 

Contact us for a free risk assessment

 

About CreditRiskMonitor

CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of over 58,000 global public companies.

At the core of CreditRiskMonitor’s service is its 96% accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z” score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $135 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.