FAIR PAYMENTS
Financial Risk Still an Obstacle The economic headwinds at home and abroad are set to provide a testing period ahead. Paul Trigg, timber specialist and assistant head of risk underwriting at global credit insurer Euler Hermes, discusses why.
dropped sharply, together with the falls in demand across China, Russia and Brazil, is of particular concern.
Looking at how other UK industries performed last year, timber fared well on the tailwind of favourable trading conditions. But while the number of late payments across the sector dipped in 2015 compared with the previous year, several large failures across the industry served as a timely reminder that timber businesses need to be vigilant of significant financial risk. The troubles across construction are well documented, and as such, timber sub-sectors operating in close proximity saw a deterioration in client payment behaviour. Joinery firms, for example, saw an 11% year-on-year increase in payment delays last year, and it’s difficult to see much improvement over the next 12 months as construction struggles in face of the acute skills shortage, inflating input costs, a steep decline in residential housebuilding activity and delayed investment decisions. The overall outlook is fairly uncertain. Activity levels across timber are being affected by the fall in construction output and, together with the impact of global
economic factors, it’s having a marked impact on company margins with UK timber prices showing little sign of upward movement following last year’s 15-20% drop. Foreign exchange movements are creating significant volatility, pushing timber importers to be increasingly flexible on target markets to ensure competitive purchasing. Sterling’s slide both before and after June’s referendum decision has held back timber trade with the UK, leading mills across Europe to look elsewhere for markets with better returns. Sweden, for whom the UK is the largest export market, is a prime example. Given the uncertainty surrounding future trade with the EU for the foreseeable future and wider global economic uncertainty, it’s difficult to predict at what level sterling will settle at. As timber is a global commodity and market dynamics outside the UK have an impact on price, global economic headwinds are also playing a significant role. A slowdown in North Africa, where the numbers of commercial and residential projects have
Despite dwindling commodity prices, interest rates and low inflation, companies are not set to enjoy any improvements in UK consumer confidence in the shortterm. Concerns about current economic prospects, largely surrounding the UK’s future relationship with its largest trading partner, have seen consumer confidence nose dive at the sharpest rate in 21 years according to research from GfK. Taking in each of these points, it’s fair to say the next 12 months at least will be challenging for businesses across the timber supply chain. Management teams will do well to keep a close eye on both margins and stock levels to ensure they don’t hold too much product should timber prices fall further. Strategy will also be key, particularly when it comes to decisions on selling at a loss or holding on to stock in the hope of short-term price rises. In addition to this, businesses should be particularly vigilant on customer and debtor management to keep track of any changes in payment behaviour, such as rises in Day Sales Outstanding (DSO). Maintaining a close eye on bad debt red flags, together with exacting appropriate due diligence on new customers will help businesses navigate the increasing financial risk. For more information visit: www.eulerhermes.com or Twitter @eulerhermes.
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