Wednesday, January 21, 2009

The current state of UK steel and manufacturing

Well, the last quarter of 2008 was a shock to manufacturing and the steel industry, as the global financial crisis and resulting economic downturn started to hit home.

The first half of 2008 had seen high steel demand, rapidly rising prices and shortages. Many pundits were forecasting more of the same for the foreseeable future, without of course knowledge of the looming crisis, that the banks of the world were about to visit upon us.

I will not dwell upon the role of the banks as their incompetence is indefensible, and the consequences for the rest of us are being seen all around.

Manufacturers, retailers and consumers rely on money to conduct business, it’s the facilitator of all transactions and when it is not available either in the form of cash or credit, business stagnates. Demand has not disappeared, but the means to facilitate demand has, and despite the unprecedented measures undertaken by governments around the world, this situation is not going to change any time soon.

Against this background the steel and manufacturing industry in the UK arrives in 2009, to the worst trading conditions of modern times. This recession cannot be compared with anything from the 80’s and 90’s, it is going to be deeper and longer, and change the face of our industry. It is all about confidence. The banks are not lending to consumers who are not buying goods, the manufacturers have no work and the banks are not extending overdrafts, the steelmakers and distributors have no orders, so production has stopped and plants are closing, some temporarily some for ever.

The UK shares these problems with the rest of the world, but suffers from some more unique ones. Poor payment performance within the industrial sector and the insolvency laws here have made suppliers wary of extending credit without insurance. The trade insurance companies have been “pulling” cover on large numbers of manufacturers, particularly those involved in the construction and automotive sectors. This means that it can be a risky business to supply companies active in these fields, even if they have orders to place. We are seeing large companies (who are household names) failing at record rates, yet a lack of orders means suppliers are taking risks and exposing themselves to dangerous bad debts. UK consumers have for years been financing their purchasing on credit supported by large equity in their properties, equities that are rapidly shrinking. Banks are running scared and foreclosing.

Manufacturing activity is falling at such a rapid rate that there is inevitably going to be an increase in business failures, with many manufacturing facilities closing for ever. The shrinking order book will result in closures within the steel supply chain, as even the largest and strongest companies cannot continue without work for long periods. Our motor industry is either on short time, shut, or planning extended closures, Jaguar Rover has it’s hand out for Government money (along with Corus), and the supply chain is on short time along with their raw material providers. Construction is at a standstill, and there are half completed building developments all over the country with work stopped.

It is not of course the end for our industry, and demand still exists and eventually the banking problems will be resolved, consumer confidence will increase, and we will get back to work. I believe however that the size and nature of our steel industry, distribution network and steel consuming industry is going to look a little different in a few months time.

It’s going to be a rough ride!

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