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Two-thirds of the World’s Business Sectors To Carry Risks in 2013

29 January 2013 Coface

International credit insurer Coface says in its latest economic review for 2013 that business credit risk is varying noticeably according to business sector:

Pharmaceuticals, energy and transportation are resilient;
Agro-food, automobiles and electronics are to be monitored;
Construction, metallurgy and retail are weakened and exposed to high credit risk.

The analysis by Coface uses three original indicators – strength of turnover, financial robustness and credit risk. The model was developed by Coface economists and drawn from the payment experience of companies analysed by Coface underwriters.

Strongsectors: Pharmaceuticals are benefiting from rising health spending. Energy is taking advantage of its capacity to generate cash flow. Maritime and air transportation, although less robust on the financial level, are at moderate credit risk due to a controlled risk policy.

Sectors to bemonitored: Agro-food, automobiles and electronics are considered risky by Coface. While the agro-food and automobile industries react differently according to geographical areas, electronics is being affected by the Chinese economic slowdown and the European recession.

Fragilesectors: The outlook is particularly bleak for three business sectors: construction, metallurgy and distribution. Payment incidents indicate there is significant risk, particularly in Southern Europe.

Construction is by its nature vulnerable to the economic climate of the regions. In the US Coface expects a slight upturn in activity while Europe’s economic difficulties continue to affect households and public institutions, limiting their investments without hope of an immediate upturn. In China measures have been taken to deflate the housing bubble. The case of retail is different. Although the claims rate is changing positively, the sector is being affected by the contraction in household consumption in developed countries.

Steel industry in China: Consolidation that carries short-term risks

In ten years, Coface has observed a move of steel production from Europe to Asia, now representing 65% of world production.

At the same time, demand for steel has also shifted to emerging countries while European demand has dropped sharply. The main client industries for steel are automobile (50%) and construction (12%), both experiencing difficulties in Europe.

China, now the largest producer and consumer of steel, has been hit hard by the contraction of activity in the country and its main trading partners. The Chinese steel sector is characterised by overcapacity due to the presence of thousands of producers, making companies vulnerable to the current slowdown.

Restructuring of the sector, led by the Chinese authorities, seeks to instigate a move in production to the upmarket segment to enhance the prominence of the country on the international steel market. According to Coface, while the restructuring process could result in a number of casualties among non-viable players in the short term, it will allow for the strengthening of the network of Chinese steel companies in the longer term.

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