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Euler Hermes: US aluminum diecasting industry is in "crisis" mode

The US aluminum diecasting industry is in "nothing short of a crisis" mode at the moment amid a struggling automotive market, said credit insurer Euler Hermes.

Tony Clary, vice-president, industry manager, told that any sector of the industry with exposure to the automotive market should be "extremely worried at the moment" as automotive sales have hit their worst level since the 1950s. Overall automotive industry sales dropped 35% in November. Ford actually beat the industry, reporting a sales drop of 30%, but General Motors reported a 41% drop and Chrysler's fell 42%. Nissan's sales dropped 44%, Toyota fell 35%, and Honda fell a similar amount.

"We cannot continue to operate at these levels or the entire industry is going to go down," Mike DiGiovanni, GM's director of market analysis, said in a statement, acknowledging that the steep drop in sales in October and November was devastating to the company's finances.

On December 4, heads of the Big Three US automakers headed back to Washington, DC, asking Congress for $34 billion in low-cost government loans -- $9 billion more than the roughly $25 billion the automakers had sought just last month.

Calling GM, Chrysler and Ford the "Detroit Three" instead of the "Big Three," Clary said there could be a domino effect if "something" happened to the companies, such as a bankruptcy filing. "I think it's very difficult to predict how devastating that would be," he said, although acknowledging the heads of those companies have stated they would only seek bankruptcy protection as a last option. "I agree with what the companies are saying that bankruptcy is not a strategic option. It's a case of consumers having no confidence buying such a big ticket item such as an automobile from a bankrupt company. That is a last-resort option for them."

US aluminum diecasters surveyed have said demand is off 20-60%. One supplier who services the truck market for the Big Three called the market "rough." He said parts orders from automotive makers are down as much as 60% from last year and said layoffs were occurring at his company for the first time in history.

When asked about any positive signs in the aluminum diecasting market, Clary said, "At this stage, I'd say no." He said the outlook for 2009 was murky. "The fact that October sales were very poor, and November was that much worse, no one can say with any confidence if we've hit the bottom yet." He said at some point, the market will improve, "but it's almost impossible to say when."

When asked about credit insurance in the industry, Clary said, "I hope the sensible ones have credit insurance in place. If not, I'd be surprised because with the current position in the industry, it you do not have insurance on the receivable, it'd be hard to find now."

He said in good times, credit insurance requests would be approved, but now with risk profile deteriorating, if they continue to decline, "we will stop approving new requests." Said Clary, if risk profiles continue to decline, Euler Hermes would look at the exposure already in place and see if that exposure needed to be reduced or ultimately canceled.

But he stressed, "We haven't said we are not granting insurance coverage on the industry as a whole." However, he admitted trying to find which companies "we feel are strong enough to survive the current market condition is difficult."

Clary said he'd not be surprised to see more bankruptcy filings among the secondary aluminum industry. Recently, recycler Commercial Alloys and diecaster Intermet filed for voluntary Chapter 11 bankruptcy protection. "It is impossible to say we've seen the worst of it. As the current conditions persist, and the longer they persist, the more likely it is for companies to file for bankruptcy."

He said any companies for which Euler Hermes has exposure, it will continue to monitor for any possible changes -- either to reduce or cancel exposure. The insurer monitors specific corporate, market and economic information in making its determination on credit insurance.

As the automotive market "is in crisis," Eurler Hermes is looking at companies and their financial statements, "trying to determine which have financial stability to weather this storm," said Clary. "For any industry that is in the current situation that the automotive market is in, there will be elevated levels of reductions and cancellations of exposures."

Clary said Euler Hermes' chief economist is not expecting any real sign of improvement in demand until the second half. "But this environment makes it difficult to predict with any confidence," he said.

But he said, Euler Hermes has more clarity in making its decisions on specific companies than it did two years ago as it is now received companies' financial information three or four times a year, rather than yearly previously. "We need to see the current situation," he said.

Against all this doom and gloom, the global aluminum diecasting market is projected to exceed 15.6 billion lb by the year 2012, according to a recent report by Global Industry Analysts. Europe is the largest aluminum diecasting market in the world and is projected to exceed 4.6 billion lb by the year 2012.

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