Trade-credit insurance, which protects trade and helps commodities flow smoothly around the world, has been severely curtailed for US companies, choking some supply chains, according to a Wall Street Journal report.
Companies are often wary of moving goods without trade-credit insurance, so the resulting snarl has caused delays and cancelations of shipments of metals even as demand for raw materials increases.
Suppliers take out trade-credit insurance in case customers don’t pay, while banks purchase it to insure deals they finance, WSJ reported. However, insurers have become increasingly hesitant to write policies for metals like aluminum and nickel due to problems in the industries that purchase them. The auto and aviation industries, for instance, have seen sales fall during the COVID-19 pandemic.
It is “an incredibly difficult predicament,” Jay Sandler, president of Imperial Zinc Corp., told WSJ. “Credit insurance is an extremely important tool for our business.”
Much of the aluminum the company sells goes to the auto industry, where many insurance policies have been reduced or canceled, WSJ reported – and Imperial is unwilling to sell without coverage.
While credit insurance isn’t as prevalent in the US as in Europe, it’s popular with American companies that operate on slender margins and can’t risk customers defaulting. Exporters that borrow against foreign sales also often purchase the coverage, WSJ reported. About $600 billion in US sales were covered by credit insurance in 2019.