Credit insurance squeeze could hurt UK steel

UK banks are trying to support stockholders, but credit insurance reduction could lessen the impact of their help.

Some UK steel stockholders have been offered interest free 12-month loans by banks, after the government announced loan guarantees. One company said it was offered £1mn on these terms. Those with revenue of £500mn can borrow up to £25mn interest free.

But the increasing risk aversion of credit insurers could make such loans less helpful. One large coil supplier estimates 70pc of stockholders have had their credit insurance reduced, if not pulled, by leading insurers. Insurers were spooked by high profile failures at several household steel names last year — such as British Steel, Meridian and Parker Steel. "They give you an umbrella when the sun shines, then take it back when it rains," another leading coil supplier said. One plans to discuss the issue of credit insurance with the government, as it could see the sector grind to a halt.

As a result, firms started reducing their exposure to the sector in general, and some participants now expect a rush of withdrawals.

One yellow goods sub-supplier has just had over £1mn worth of cover withdrawn by an insurer. Stockholders either have to run the risk of supplying without cover, or not supplying. Several decoilers are already seeing payments slip, and many customers are closing. Two large decoilers said they are selling 50-60pc of their usual volume, having furloughed staff in the last week or so because of the lack of demand. Some are supposedly closing today for two weeks to a month or so, but keeping some staff back for essential deliveries and works.

Reduction/retraction of credit insurance will be a huge problem for those that invoice discount, or borrow from banks against an invoice and pay a fee. Many stockholders in the UK operate this model. If insurance on customers is cut, they will have less steel to raise invoices on — as they already do with customers closing. If suppliers have limits pulled on the service centres, it means they can buy less, again reducing the amount of material they have to sell.

By Colin Richardson