The European metals sector has the highest credit risk globally, according to Coface.

Coface economist Emmanuelle Hirsch tells GTR that excess capacity remains the most significant issue in the metals sector.

In 2012, there was an estimated surplus of 56 million tonnes of steel in the world. Despite Europe cutting its production capacity by around 30 million tonnes, the current trend indicates a continuation of this excess.

Hirsch tells GTR that: “Steel demand in the EU is expected to contract further by 0.5% in 2013. A moderate recovery is expected in 2014/15 at the earliest.”

Hirsch says that since reducing production is both expensive and time-consuming, steel producers may be more inclined to keep their production line active. This will have a knock-on effect on the price, keeping it low and affecting the profitability of steel producers. He says producers are retaining loss-making excess capacity because they are hoping to either receive economic assistance from their governments or to see an increase in demand.

Commenting on the future of the European metals sector, Hirsch tells GTR that improving process efficiency and increasing product quality could be key ways for steelmakers to lower production costs and increase sale prices, which would contribute to reducing the EU metals sector’s credit risk.

Another cause for concern for the metal industry, particularly the steelmakers, is the fact that the automobile and construction sectors are its main clients. Coface lists both industries as high risk because they remain extremely vulnerable to sluggish European domestic demand.

Hirsch says the auto sector is experiencing a slump in car sales in almost every country in Western Europe due mainly to severe contractions in economic activity that’s linked with increasing unemployment across Europe.

Moreover, construction is being hit by a depressed housing market in many European countries such as Spain, the UK and Italy. Housing prices in France are falling in the wealthiest areas due to a struggling economy and lack of demand despite low interest rates.

Coface economist Khalid Ait-Yahia tells GTR that recovery isn’t expected in the automobile or construction industry in the near future, as the economic climate indicators are still on a negative trend.

Overall, the credit risk in the metal industry has increased globally since Coface’s 2012 credit risk assessment survey. North America’s metal industry remains high because of the inflow of cheap Chinese steel. The Chinese steel industry has strengthened its leading world position with its 46.3% market share in 2012. However, it has not avoided being hit with overcapacity and its businesses are witnessing sharp falls in profit.