Shortage of gas supplies is a major downside risk
In 2021, the industry recorded a strong rebound. In H1 of 2022 demand for metals and steel benefited from a stable performance of construction and machines/engineering. Demand from automotive was weak in early 2021 but has improved since Q2. However, we expect Czech industrial production to slow down in the coming months, due to weaker demand from the Eurozone, supply chain issues and high energy costs.
After increasing their margins in 2021, Czech metals and steel businesses should see a deterioration in 2022 and in early 2023. High transport and energy prices affect the sector performance, while the EU emissions trading system is an additional burden. In order to compensate for iron ore and other commodities provided from Ukraine before the Russian invasion, metals and steel producers had to find alternative supply sources. So far, the majority of businesses have been able to pass on higher energy prices to their buyers, at least to some extent. However, pressure is mounting, as energy prices are likely to remain very high in the coming months. Some metals and steel producers consider curbing their output, as profitability is at stake. Fiscal support to the sector remains limited, which could result in less competitiveness against peer businesses from abroad.
Payments in the Czech metals and steel industry take 30-60 days on average, and payment behavior in the industry has been good during the past two years, with a low number of insolvencies. The payment and insolvency development in the coming months largely depends on energy prices and availability of gas. Should Russia sharply reduce or even stop gas supplies, the impact on the sector´s credit risk would be serious, probably leading to a high number of defaults. In such a scenario, we would expect metals and steel output to contract by 0.5% in 2023.
For the time being, our underwriting stance remains neutral across all major metals and steel subsectors, considering the good performance seen in 2021 and early 2022. However, we closely monitor developments in the energy market. We also observe the debt structure of companies after the recent interest rate increases, which results in higher financial costs for leveraged businesses.