Impact of the economic downturn

The steel industry witnessed an unprecedented increase in prices in the first half of 2008; in some regions, the benchmark hot-roll price increased by up to 70% during this period. During the first half of 2008, demand outstripped consumption. In August, this imbalance reduced the dramatic rise in prices. However, in September, the lack of credit availability caused a drop in Demand that resulted in significant price declines in October of up to 30%, Looking forward, the consensus in the industry and in the market seems to indicate that demand and price will continue to fall but there is no agreement regarding the extent. We believe that prices for the end of 2008 will approximate those of December 2007.

For the first half of 2008, aluminium prices experienced a more gradual rise, but since July prices have been on a steady decline with the three-month LME falling roughly 20% in the third quarter, a trend which is continuing. At current price levels, it is estimated that a large portion of global aluminium production could now be operating at a loss. Given the decline in pricing, the economics of plants/divisions recently acquired is coming under question.

The prices of many key steel raw materials are locked in by contract and will not decline at the same rate as the drop in prices. There is some suggestion that the tradition annual supply contract for raw materials and steel may not survive in its current form. Many companies, particularly steel companies, have stated that they intent to cut back on production, current expansion plans and go into cash conservation mode. Unlike the last global economic downturn, the globalization of the metals industry means that most of the producers cannot mitigate the effect of the recession by exporting to the countries where the economic impact is not as severe.

How we can help

PwC has strong credentials in helping clients with cost reduction through performance improvement, financial and operational effectiveness, treasury and cash management. Our global network of metals industry experts works with our teams in these areas to support clients in finding the right solutions which will help them through the challenging short term financial environment and build towards sustainable long term business practices. Our experienced transaction services specialists can help clients re-evaluate acquisitions strategies and assess opportunities for divesting non-core divisions to streamline operations.