COVID-19: What it means for metals manufacturing

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Practical steps for responding to the coronavirus crisis

The COVID-19 pandemic and its disruption to industrial production has begun to impact metals production, especially steel. This comes on the heels of a difficult period for the industry in 2019, when it struggled with tariffs and experienced early signs of a demand slowdown. Now, the industry is in a day-to-day mode of monitoring and forecasting the demand for products from end-users, including the automotive sector, oil and gas industries, and others, such as white-goods (large home appliances) manufacturers. 

As this crisis plays out, metals manufacturers will need to improve forecasting related to the potential for slackening demand among downstream steel consumers — especially industries that may be classified as “non-essential.” For instance, the automotive industry, a major consumer of US steel, may already be slowing down production in numerous plants. 

The engineering and construction industry may experience its own slowdown — with some construction sites locked down — which could also contribute to reduced demand for steel products. Additionally, aluminum producers and makers of specialty metals such as titanium should look closely at the aerospace and defense industry for possible signs of market demand, both on the upside and downside. However, the operational nature of the metals industry — with long leads required to idle and then restart mills and smelters — presents challenges that require nimble and swift reactions to market dynamics.


What are your top 3 concerns with respect to COVID-19? (Select up to three.)

Financial impact, including effects on results of operations, future periods and liquidity and capital resources
%
Potential global recession
%
The effects on our workforce/reduction in productivity
%
Decrease in consumer confidence reducing consumption
%
Supply chain disruptions
%
Difficulties with funding
%
Not having enough information to make good decisions
%
Impacts on tax, trade, or immigration
%
Cybersecurity risks
%
Fraud risks
%
Privacy risks
%
Source: PwC COVID-19 US CFO Pulse Survey
April 22, 2020: base of 305

A misalignment of supply and demand could trigger an over-supply of inventories that could lead to sudden price drops. Going forward, the decision on whether metals manufacturing companies (particularly steel producers) and their major end-users are nationally classified as “essential industries” may determine the level of impact on the industry. Meanwhile, metals companies are shoring up their cash liquidity and looking to short-term borrowing to help cover operating costs.

Currently, about 80% of manufacturers expect that the pandemic may have a financial impact on their business, according to a recent survey of the National Association of Manufacturers (NAM). That compares to 48% of cross-industry companies that expect the same, according to a recent PwC survey of CFOs. 

The majority (53%) of those in the sector expect COVID-19 to impact their operations, according to the NAM survey. Indeed, we’re already seeing these dire expectations materialize in the sector, amid plummeting oil prices, supply chain bottlenecks, recession fears and spending slowdowns. Plant closures (even partial) at downstream, steel-consuming industrial manufacturers could be necessary for manufacturers in hard-hit regions for a prolonged period.

Indeed, uncertainty surrounding the duration (or even a deepening) of these conditions can make it difficult to see how a recovery could play out directly for steel customers and indirectly for the steel industry. Though many customers in the sector could be eligible for government stimulus support, there is a real possibility that the crisis may result in debt restructuring or bankruptcy for some downstream end-users, as declining demand, production, revenues and debt obligations take a cumulative toll.

Most companies already have business continuity plans, but those may not address the fast-moving and unknown variables of an outbreak such as COVID-19. Typical contingency plans help confirm operational effectiveness following events like natural disasters, cyber incidents and power outages, among others. They don’t generally take into account the widespread quarantines, extended school closures and added travel restrictions that may occur in the case of a health emergency.

General guidance on COVID-19

The coronavirus (COVID-19) pandemic is causing widespread concern and economic hardship for some consumers, businesses and communities across the globe. The situation is fast-moving, with widespread impacts. We’ve prepared some general guidance on COVID-19: What US business leaders should know: crisis management and response, workforce, operations and supply chain, financial reporting, and tax and trade. 

The crisis raises a number of unique challenges. In PwC’s inaugural COVID-19 CFO Pulse Survey, finance leaders in the United States and Mexico shared their top concerns.

What makes the metals manufacturing sector different

Here is our take on some issues that companies in your industry may face:

Crisis management and response

Issues that the metals sector might face:

Metals manufacturers may experience downward pressure on demand, production and revenues as the COVID-19 pandemic intensifies. Manufacturers of metals for industrial use (copper, aluminum and steel, among others) may experience a pull-back in demand as end-users of these metals and metal products — such as the automotive, oil and gas, and engineering and construction sectors —  face their own slackened demand. 

If reduced demand persists, metals manufacturers may face cash-flow liquidity challenges and difficulties in managing debt obligations. The industry may see end-users struggle to recover — depending on how robust and effective any government support may be, and how long the COVID-19 crisis lasts.

The metals industry may be especially vulnerable given that the bulk of its workers are in on-site jobs that cannot be done remotely. Given the nature of the industry, metals manufacturers will need to consider how to create social distancing in workplaces that are typically worker-dense (e.g., mills, warehouses, material movements and logistics, etc.).

On top of this, metals may experience supply chain disruptions, especially as a result of struggles of the supply chain business partners that provide raw materials, components and machinery.

Prepare for a possible prolonged recovery. Given the unknown variables of how the COVID-19 pandemic may play out and when containment may be  achieved, metals manufacturers should expect to brace for a trying period and plan for a recovery that may not arrive for at least one year, given prior crises the industry has experienced.

Metals manufacturers should expect to enter a new era of closer public-private coordination in order to achieve the right balance between producing materials products that are key to the nation’s critical infrastructures and protecting public health.

Steps to consider:

  • Assess how profitability, loans, revolving credit and cash-flow reserves can support ongoing operations in a low-revenue environment — in light of current (and forecasted) cash operating expenses, taxes and other cash expense items.
  • Review capital and corporate cost budgets to identify not only marginal investments, but also discretionary items that can be cut. 
  • Consider divesting non-core or underperforming assets — or assessing M&A prospects — as a potential source of cash.
  • Consider refinancing debt or tapping into lines of credit.
  • Work closely with municipal, state and federal governments to coordinate plans on worker and consumer safety, while keeping mission-critical productions running.

Workforce

Issues that the metals sector might face:

As metal-consuming end-users reduce demand for inputs, the sector may experience a prolonged reduction in capacity and cost structure — and that could translate into possible staff reductions and related measures.

Metal manufacturers, due to the nature of their business, should expect that they will need to change where (via social distancing) and when (staggering or rotating shifts) their workers work.

Companies also should brace for the possibility of widening outbreaks of COVID-19 affecting their workers, and should evaluate the possibility of outsourcing some corporate functions (e.g., moving IT to the cloud or shifting internal non-core operating functions to contractors). Such changes can help to lower operating costs and eliminate maintenance capital.

Steps to consider:

  • Confirm your employees are safe and know how to protect themselves. Institute sanitation rules in the workplace, and assess mobility policies to encourage remote working, where possible and necessary. Ask employees who are sick to stay home until they are better. Eliminate non-essential travel.
  • Discuss change management and flexible work arrangements. Expect a learning curve as companies devise new ways of working that may involve more remote workers and automation on the factory floors. 
  • Assess strategies and plans to help retain and deploy the workforce during the slowdown, and establish risk mitigation programs for employees who may still need to work on-site. Invest in education campaigns for front-line employees who have to be on-site to confirm they know how to minimize the spread of the disease and what to do if they feel ill. 
  • Gather necessary data on employees (geography, visa, etc.) and track movements during the crisis.

Operations and supply chain

Issues that the metals sector might face:

With much of their supplies and feedstock locally sourced, metals manufacturers may not be as vulnerable to supply chain bottlenecks as other industrial products sectors. However, their customers’ domestic and global supply chain complications may have an impact on metals demand. 

As with previous downturns, the industry is likely to quickly move to cut discretionary and capital spending to support operations. A key question for metals manufacturing companies is: Do you have the financial reserves to weather the storm — or even to capitalize on potential tumult in the industry?

Steps to consider:

  • Improve your supply chain visibility and lines of communication to better detect potential problems and remediate early. If you don’t already have digital supply chain transparency solutions in place, create greater transparency through daily self-reporting with critical suppliers. 
  • Keep an open and regular dialogue with your suppliers and customers on how they may be impacted by COVID-19 and how their forecast demand  — particularly surrounding steel and steel products — could affect your business.
  • Seek alternatives that allow you to preserve relationships, co-create solutions and sustain both businesses. It’s possible that a third-party provider may prove to be a critical point of failure in creating a response to COVID-19.

Financial reporting

Issues that the metals sector might face:

Disruption in the sector may lead to numerous financial disclosure implications. Stakeholders are making it clear that they expect transparency from companies, disclosures about actual and anticipated impacts, and, most important, the risks and vulnerabilities to the business. 

Steps to consider:

  • Consider broadening disclosures to go beyond what’s required in financial statements. For example, disclose management’s analysis of the current and future impact of liquidity and credit crunch on the business.
  • Plan for disclosures about risks, such as how recent events may impact current and future judgments and estimates inherent in financial reporting (e.g., inventory obsolescence, receivables collectibility, debt covenants, impairments).
  • Proactively communicate with lenders and other stakeholders, avoiding surprises and helping to enable potential rescheduling of debt or alternative financing sources.

Tax and trade

Issues that the metals sector might face:

Some metals companies may be contenders for government-provided financial assistance. Extending lines of credit, reducing infrastructure costs, providing short-term funding, lowering the tax burden and offering supply chain assistance are helpful measures that governments are likely to explore.

Multinational companies should expect potential cash-flow constraints from overseas operations — including cash repatriation complications and irregularities. Cash could also be bottlenecked when goods are paid for but not supplied (or delayed and stranded). Such cash bottlenecks may occur in geographies most affected by COVID-19.

Steps to consider:

  • Take into account the tax and tariff implications of any changes to the supply chain. Implications could include customs and duties, as well as transfer-pricing considerations if the substitute components or materials are internally sourced.
  • Explore how a potential fiscal stimulus could impact your company through tax benefits: e.g., payroll tax reduction, NOL carrybacks, delay of effective date of certain TCJA provisions, add-back of depreciation and amortization for Section 163(j) purposes, and deferring amortization of R&D expenditures.
  • Companies with extensive international supply chains need to consider the tax and transfer-pricing components of restructuring their supply chains.
  • Address mobility and immigration issues for employees moving in and out of areas affected by COVID-19. Consider the tax implications of mobility. Depending on where you temporarily host employees, the company — and the employees — may face unintended tax consequences.
  • Prepare and plan for different types of support governments may extend — from emergency funding to state guarantees of new loans to tax incentives or deferrals.
  • Plan strategically. Operations in one jurisdiction may be more favorable — both tax-wise and operationally — than another during this crisis.

The way forward

As the COVID-19 crisis persists, metal manufacturers could be affected on numerous fronts and by external factors. These include the low oil-price environment, scrap prices and how US industrial production — particularly the automotive and construction sectors — may be impacted. In addition, Asian markets for metals could affect US metals companies, depending on the extent of a recovery of industrial production and when a rebound in the demand for steel, aluminum and specialty metals could occur.

At the outset of any major commercial disruption, companies may be looking for immediate measures to keep their workforces safe and their businesses solvent. But companies should also be thinking about the future: What assets, people and capabilities will they need or want then?

Companies may also need to look beyond their own economic viability. They may need to coordinate closely with the public sector to forge plans that are essential to both public safety and the solvency and security of their workforce, while keeping the lights on in their operations. They may need to align closely with metals end-users in order to accurately  forecast what the demand for their products will be — now and throughout the recovery from the pandemic.

Most companies in the sector may need to take concrete steps to navigate in this challenging climate. Some will be austere, but austerity measures should be tempered to preserve long-term objectives. The best approach is likely to include making surgical cuts, while balancing short- and long-term needs.

Contact us

Jeff Sorensen

Jeff Sorensen

Industrial Products Industry Leader, PwC US

Michael Tomera

Michael Tomera

US TAS Market Leader, Midwest Market, PwC US

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