A number of smaller steel makers, caught short by the rapid decline of the markets, could be facing the bleak prospect of liquidation down the line, underwriters Credit Guarantee Insurance Corporation warned on Monday.

"The pressure on international commodity markets is already well known, prices have fallen along with demand, but perhaps we should spare a thought for the smaller steel traders who, due to the rapid decline of the markets may very well have been caught, literally quite short," said Credit Guarantee.

Many traders are sitting on stockpiles that have been purchased at prices significantly higher than present value, putting many traders in an extremely difficult position – hold or sell at a loss.

"Hold and the cost of the product creeps up due to interest rates, cash flow impediments, etc; sell at a loss and obviously the cash flow and profit margins are dented. Similarly, orders have been placed for the further supply of steel, many of which were placed at a potentially much higher purchase prices compared to current trade," Credit Guarantee explained.

It added that sellers will endeavour to force buyers to honour such orders, which are commitments from which they cannot readily extricate themselves without adversely affecting their company's creditworthiness.

Strain nearing breaking point

Raymond Lellyett, senior manager in charge of the Iron and Steel portfolio at Credit Guarantee, says that the strain being placed on all players in this industry is nearing breaking point.

"Our clients have been hit by a number of steel price increases over the past year, and now this," said Lellyett.

"Any number of companies could be facing the bleak prospect of liquidation down the line," he warned.

Actual steel prices are some 20 percent off their highs with more cuts likely, but not all buyers are likely to get access to cheaper products.

On the international front, Credit Guarantee's general manager for export, Ismail Dadabhay, predicts that the incidence of repudiated contracts will shoot up as a result of the turmoil in the commodities market and even more companies seeking protection from their creditors through the various bits of company legislation across the globe.

"This is tantamount to liquidation and could drag on indefinitely, leaving creditors unable to recover any monies they are owed," said Dadabhay.

"Whatever the outcome, it will not be business as usual," he said.

I-Net Bridge