Britain’s Steel crisis has left a trail of devastation: closed plants, thousands of lost jobs and bleak prospects for communities that depended on the metal for employment.
The fallout from the industry’s drawn-out demise — triggered by a sharp drop in global prices — is now spreading to steelmakers’ network of suppliers, which face lower earnings, job cuts and potential insolvency.
The impact will be concentrated in the UK’s three regional steelmaking hubs of Teesside, Scunthorpe and South Wales, says Mark Firmin of KPMG.
“We expect to continue to see high levels of restructuring in the steel sector and ancillary support services, particularly among SMEs that derive a large proportion of revenues from their local steel industry,” he adds.
As well as the threat hanging over hundreds of smaller enterprises, there are signs of repercussions for some bigger, publicly listed companies. These range from logistics firms to manufacturers of industrial goods used in the steelmaking process.
One is Hargreaves Services, the Aim-quoted solid fuels and bulk materials company. It provided coal to the historic Redcar steelworks in north-east England that closed in October with the loss of 2,200 jobs. Redcar’s Thailand-based owner, Sahaviriya Steel Industries UK, collapsed, owing tens of millions of pounds to suppliers.
A further 834 posts have been lost or declared at risk — meaning redundancy is highly probable — among 24 businesses in the supply chain, according to Tees Valley Unlimited, a partnership between business and local authorities.
These include 150 posts at the Redcar site’s coal handling operation that Hargreaves ran. The County Durham-based company says termination of activities at Redcar will mean a £4m reduction in future annual operating profits — equivalent to 10.5 per cent of the £38.1m it generated last year — while one-off redundancy payments will cost £1.5m.
At the nearby Teesside operations of PD Ports, which is owned by the Canadian property company, Brookfield, imports of raw materials and exports of slab steel by SSI UK accounted for almost 30 per cent of the 40m tonnage handled last year. The loss of business means PD Ports slides down the rankings of the UK’s busiest ports by tonnage, after occupying third place in 2014.
“It is a blow, there is no question. But we as a business will rebuild this volume,” David Robinson, PD Ports chief executive, said as the company declared 80 redundancies among its 700 Teesside employees last month.
Exactly what this will mean for PD’s profit — which in 2014 was £6.3m before tax — is unclear, as the company declined to comment. In a recent letter to its investors, Brookfield signalled that its work for SSI UK accounted for less than 1 per cent of earnings before interest, taxes, depreciation and amortisation in its wider infrastructure fund. Ebitda for the fund was $305m in the third quarter this year.
Elsewhere, suppliers are counting the cost of their customers’ attempts to stave off financial collapse.
Shortly after Tata Steel announced it would scale back operations at its Scunthorpe plant, with the loss of 900 jobs, its suppliers received demands for an immediate 10 per price reduction, to be extended to 30 per cent.
Analysts say one company that could suffer from such aggressive cost cutting is Vesuvius. The FTSE 250 engineering group makes ceramic linings that can withstand extremely high temperatures for furnaces and foundries, known as refractories, and about 60 per cent of its sales are to iron and steel customers.
Sanjay Jha, analyst at Panmure Gordon, estimates that the company derives more than 8 per cent of its sales from the UK and South Africa, where another customer, ArcelorMittal, is retrenching. It also has exposure to the similarly deteriorating US steel market.
“This is a structural decline, and Vesuvius faces permanent loss of revenues. We expect more restructuring charges as [it] scales back its operations,” says Mr Jha. He expects management to lower profit guidance in an interim management statement on Thursday. The group posted pre-tax profit of £111.2m last year.
David Larkam, an analyst at Numis, says the manufacturers best placed to weather the slowdown will be those that have diversified their product ranges and geographies.
“For the large [manufacturers], their total UK exposure is less than 10 per cent. Most have moved away from a lot of these commodity areas,” he says.
But even they are not immune to broader market problems.
“[A] bigger issue is the lack of investment and slowdown in China,” Mr Larkam adds.
Source: http://www.ft.com/