Heavy engineering firms feel the squeeze as payment defaults rise by another 16%
New insurer data reveals the impact of the declining oil price, tough economy and cost pressures on oil and gas engineering firms.
Leading trade credit insurer, Atradius, has revealed that the number of claims for late or failed payments for UK engineering companies increased by 16% in the year to August 2024, as traditional heavy engineering firms were hit by the declining oil price, rocky economy and cost pressures.
The 16% rise in default claims comes after a 50% increase in the previous twelve months (August 2022 to August 2023), although there was a levelling off (0% change) in claims between July and August 2024, Atradius data shows.
Chris Wall, Atradius engineering sector specialist, says that as well as economic pressures and high costs, traditional UK heavy engineering firms, particularly those operating in downstream oil and gas, had suffered as a result of growing costs to comply with environmental regulations and levies. “It is difficult to do business in the UK if you’re a heavy engineering firm,” he says.
The Atradius claims figures coincide with the news that Scotland's only oil refinery, Grangemouth, is to close by the summer of 2025, due to global market pressures and competition from bigger, more modern and efficient sites in the Middle East, Asia and Africa.
However, behind Atradius’ latest claims figures lies a diverse engineering sector, with diverging fortunes. While heavy engineering firms weather cost and regulatory pressures, a vibrant, world-class science and engineering research base is emerging. This comprises smaller companies which have benefited from increasing public funding for research; total UK government R&D expenditure has increased by 32.6% from 2011 to 2022, when it stood at £13.7 billion (adjusted for inflation)[2].
Chris Wall, Senior Underwriter at Atradius UK, says: “The UK was once an economy built on heavy engineering. But this is changing: due to environmental regulations and levies, it is increasingly costly to do business in the UK if you’re a heavy engineering firm.
“As well as the cost of compliance, the rise in claims we saw across engineering in the year to August is partly a result of the weak economy and the falling oil price, which is down from over $90 a barrel at its most recent peak at the start of April, to around $70, leading investment by oil and gas engineering firms to dry up. In addition, cost pressures have been huge as energy and raw material prices have gone through the roof.
“Also, having benefited from government support during the pandemic, liquidity is no longer readily available to the sector, especially as interest rates have remained high and the UK economy has now flatlined over the last two quarters.
“While heavy engineering is undoubtedly in decline, we are seeing more niche, specialist engineering businesses thrive, in sectors ranging from energy storage and healthcare to autonomous driving and Formula One. The role that the UK’s growing band of specialist engineering firms will play in the future growth of the engineering sector, and to the wider economy, shouldn’t be underestimated.
“Initiatives under the new Labour Government, like its target to build 1.5 million new homes over the next parliament, will buoy engineering services firms which provide construction machinery. But we’re yet to see what the government will do specifically to support engineering firms, beyond its pledge to support advanced manufacturing as among crucial industries that “makes Britain great”.