Jochen Duemler, CEO and head of the Americas Region of trade credit insurer Euler Hermes, explains how its product expands business, even in the face of volatility
Modern Metals: What general trends should metals companies keep their eyes on in 2014?
Jochen Duemler: We expect firmer pricing and incremental volume improvement in 2014 versus 2013. This comes on the back of continued growth in automotive and improving residential construction fundamentals. But there are risks, too. Recent price increases have widened the price discrepancy between domestic producers and imports to about $100 per ton. This could result in a pickup in import activity in early 2014 due to longer lead times associated with import purchases. Also, any significant increase in interest rates due to the Fed taper likely will adversely affect the nascent housing recovery and thus demand for structural metal products.
MM: What will be the key opportunities and how can trade credit insurance help metals companies manage them?
JD: We’re anticipating continued growth in automotive and construction industries. Additionally, there’s an ongoing benefit from lower-priced natural gas, which can help reduce energy costs and also serves as a potential long-term strategic opportunity for domestic producers. There’s a natural assumption that the nature of the metals and steel business makes it an early indicator for any economic up or downturn, and that pricing will always be volatile, resulting in a significant impact on the credit health of a company’s suppliers. Trade credit insurance helps protect against that risk, as it is a natural hedge.
Traders and wholesalers tend to have large and fluid customer bases, making real-time in-house credit monitoring difficult. Trade credit insurance helps by mitigating a portion of their credit exposure, especially when dealing with new customers or markets.
MM: Moving ahead, the metals industry appears to be exercising cautious optimism. How can trade credit insurance help boost the bottom line?
JD: Many companies initially purchase trade credit insurance to protect capital, cash flow and earnings—safely and strategically—thereby increasing sales and profits.
Companies also find they can minimize risk when exploring and developing new markets. When business is picking up, a company may be comfortable in giving limited payment terms to a new client, but beyond that, maybe they feel a bit shaky or insecure. Companies can use trade insurance as a competitive advantage, becoming comfortable granting longer payment terms—longer than a competitor would. They get the deal and it’s supported by the protections and limits trade credit insurance would grant them.
While credit insurance indemnifies losses incurred from nonpayment of commercial debt, the ultimate goal is for businesses to avoid foreseeable losses. If a loss does occur with an insured customer, we will indemnify the loss up to the policy’s credit limit. A business can secure better borrowing terms with the security that credit insurance provides. In some cases, a bank or lender can require credit insurance in order to qualify for a loan.
In addition, using knowledge from a credit insurer like Euler Hermes helps companies pick the right customers and make the best decisions for their business. We tell our policyholders everything they need to know about their customers, potential customers and marketplace so they can grow with confidence. Trade credit insurance can help free up capital for other programs and projects.
MM: Euler Hermes introduced CAP in late 2013. What advantages does it offer manufacturers?
JD: It gives them more flexibility and more protection for higher-risk deals. While we continue to offer the most coverage possible under our customers’ existing policies, situations can arise where they would benefit from increased coverage on higher-risk buyers. It is most beneficial to customers who need more coverage on partially approved or declined limits, have accounts receivable exposure above their approved limit, or have peak season, one-off or special sales opportunities. For example, holiday seasons often mean we experience a peak in demand for consumer electronics. As a manufacturer, you might have peak demand or one large order coming in. If a buyer is fairly weak, our normal underwriting capacity would be limited. This product gives our client the option to buy additional coverage or, if the company wants, a permanent additional element of protection—safeguarding a company’s financial future as it takes advantage of opportunities to grow. MM