Credit availability for recession-hit steel companies have gotten tighter since late last year as demand has collapsed and neither lenders nor the steel industry dare talk about a recovery soon.
A steel industry conference in Athens this week has heard the global recession and liquidity crisis have forced banks to hold onto their cash and tighten financing terms, which has reduced the credit lines of steel firms and consumers.
It heard limited credit availability caused payment deferrals by steel consumers, slashing demand significantly as more than 80 percent of the transaction in the long steel industry operates on the basis of banking facilities and loans.
Operators of steel mills and traders discussed at the conference alternative ways to the scarce credit conditions.
We have become the lenders to the industry, F.D. Baysal, president at U.S.-based steel traders Seba International told the Steelorbis conference in Athens.
Baysal said as credit insurers refused to cover for several steel customers, the risk was automatically taken over by steel traders, who had no choice but to do so in order to continue trading. Do we really want to be that with the little margins we have?, he asked.
Usually, credit insurers cover for traders in case of a payment deferral from their customers. But as the global recession has deepened, insurers have reduced their guarantees, while banks have become reluctant to provide financing for traders who lack the necessary cover from insurers.
Traders said conditions had worsened after September 2008, when U.S. investment bank Lehman Brothers filed for bankruptcy and several other banks had to be bailed out.
Before, the credit insurers were at least giving us a reason why they have reduced their cover, now they're just running away, one European steel trader said.
Several traders said credit insurers roughly erased at least half of their guarantees for steel payments, and the remaining half was reduced further. One Greece-based trader said the covers of 12,000 customers in the UK were erased in a day.
It is a vicious circle, a Europe-based corporate finance banker said. The trader can't sell to their customers, who can't secure financing and the banks won't provide financing as they don't believe the customers' repayment ability.
The banker said banks will have to come back to the market and resume lending, as this is how they make money.
With major central banks and governments across the globe pouring billions of dollars into the system, the market expects a positive impact on the sentiment, but just not yet.
At the moment the strategy is not about making money by selling the money, it's more about keeping the money, the banker said. (Editing by James Jukwey)
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