Supplier risk from steel crisis is underestimated warns consultant

As the UK steel crisis deepens consultant KPMG warns companies to be aware of the risks to their supply chain.

Bernadette Ballantyne
20 October 2015

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Consultant KPMG is warning manufacturing industries to be aware of the supply chain risks associated with the unravelling UK steel crisis. “Companies that are highly dependent on consistently high quality grade metals, such as those in the automotive, aerospace and the oil & gas sectors need to also keep a close watch on what is happening in the market, because it could have a significant impact on their own supply chains,” warned Stephen Cooper, head of manufacturing at KPMG in the UK.  “This ‘supplier risk’ which involves thousands of different grades of metal for key components is currently underestimated in our view,” he said.

Cooper’s comments came as Indian steel manufacturer Tata Steel’s long products Europe division confirmed that it would be stopping production of steel plate which would mean 900 job losses at its Scunthorpe plant and a further 270 losses in Scotland. The firm said the move was a response to a shift in market conditions caused by a flood of cheap imports, particularly from China, a strong pound and high electricity costs.

"Supplier risk which involves thousands of different grades of metal for key components is currently underestimated in our view,”

Stephen Cooper, head of manufacturing, KPMG

Karl Koehler, Chief Executive of Tata Steel’s European operations, said that the firm had looked at all other options before proposing these changes.“The UK steel industry is struggling for survival in the face of extremely challenging market conditions,” he said. “This industry has a crucial role to play in rebalancing the UK economy, but we need a fairer system to encourage growth. The European Commission needs to do much more to deal with unfairly traded imports – inaction threatens the future of the entire European steel industry.”

In its statement Tata Steel Europe said that in the past two years, imports of steel plate into Europe had doubled and imports from China had quadrupled, causing steel prices to fall steeply. At the same time, a stronger pound has undermined the competitiveness of the business’s Europe-bound exports, and encouraged more imports. In response, Tata Steel is concentrating on higher-value markets with a focus on developing stronger and lighter products for its customers.

Tata’s announcement is the latest in thousands of job losses due to closures in the UK steel industry. In September Thailand’s Sahaviriya Steel Industries UK (SSI) said it was closing its Redcar plant resulting in 2200 redundancies. Earlier this week the UK’s Caparo Industries announced that 16 of its companies had gone into administration affecting around 1700 employees. CIP comprises approximately 20 individual business which are active in UK steel and associated engineering businesses. Specific activities include the forging and pressing of metal products for aerospace, automotive and other industries. It also produces fastenings, wire, tubes and other accessories.

"The UK steel industry is struggling for survival ........This industry has a crucial role to play in rebalancing the UK economy, but we need a fairer system to encourage growth,"

Karl Koehler, CEO, Tata Steel Europe

 “The metals sector is currently facing a bigger threat than in 2009 when the global financial crisis sent shockwaves through the industry,” said KPMG’s Cooper “This is not only a crisis for the metals industry but a crisis that goes to the very heart of the UK’s industrial manufacturing. The negative knock on effects of this crisis for the UK economy cannot be underestimated,” he said.

Mark Firmin, head of restructuring at KPMG added: “While much of the news so far has been dominated by metal producing businesses, the current crisis has much wider implications throughout the whole supply chain. Knock-on effects will be felt by steel processors, stockholders, distributors, scrap metal dealers, metal traders, maintenance providers and equipment suppliers who will all be impacted by a falling steel price in different ways.  We also forecast significant distress within metal product manufacturing businesses. Whilst they will be benefiting from decreased input costs, their revenue will likely decline in turn.  Survival will depend on having a niche and flexible product portfolio and associated supply chain.”