Banks financing steel and aluminium component manufacturers could face deteriorating borrower margins even when their clients have no direct obligation to purchase Carbon Border Adjustment Mechanism (CBAM) certificates. EU customers may transmit carbon-related costs and emissions-evidence requirements through purchasing contracts, making export relationships an increasingly important part of credit assessment.
The proposed downstream expansion introduces additional uncertainty for loans extending beyond its intended implementation date. Manufacturers supplying products not covered by the current framework could become commercially exposed during the repayment period. Lenders therefore need to assess this potential risk when reviewing both existing facilities and applications for new production financing.
Customer Concentration and Product Coverage
The first credit question is how much revenue comes from products already covered by CBAM or potentially included in the proposed expansion. Customer concentration is equally important: losing one major purchasing programme could affect a borrower’s ability to service debt more severely than a modest average increase in costs across its order book.
Lenders should identify the products supplied to major EU customers, establish their current regulatory status and assess how proposed scope changes could affect future sales. Exposure should be evaluated at product and customer level rather than inferred from a manufacturer’s industry classification or overall export share.
Contract Terms Determine Who Bears the Cost
Loan assessments should examine how commercial agreements allocate carbon-related costs. A borrower with enforceable price-adjustment rights has a different risk profile from one committed to fixed prices throughout the contract period.
Contractual protection may not eliminate the risk, however. A supplier that seeks to pass on additional costs could lose orders if its customer can switch to an alternative source at a competitive price. Lenders need to consider both the legal terms and the borrower’s practical bargaining power.
The same applies to emissions documentation. A manufacturer may maintain adequate records of its own operations while relying on upstream suppliers that cannot provide usable precursor emissions information. The lender should establish whether the gap can be resolved through existing supplier relationships, qualified alternative inputs or investment in production and data systems.
Product-Level Scenarios Improve Credit Assessment
Financial sensitivity analysis should use product-specific assumptions rather than applying a blanket surcharge to all EU export sales. The relevant cost calculation may depend on recognised embedded emissions, applicable free-allocation adjustments, recognised carbon prices paid abroad and CBAM certificate prices.
These variables can produce materially different outcomes across a borrower’s product portfolio. Some products may face greater exposure than others, while certain goods may have limited or no liability under the applicable rules. Credit models should distinguish the current legal position from scenarios based on proposed downstream coverage.
The analysis should also consider whether the borrower can absorb additional costs, recover them through selling prices or maintain its margins by changing suppliers and production processes.
Working Capital Risks May Emerge Before Profits Fall
CBAM-related commercial pressures can affect liquidity as well as profitability. Customers may seek revised payment terms, withhold amounts pending delivery of documentation or request compensation where agreed evidence is not provided. These are potential contractual outcomes, not automatic CBAM requirements, but they could create working-capital pressure before a deterioration in annual earnings becomes apparent.
For existing facilities, a targeted review can update product coverage, customer contract terms and the availability of upstream emissions evidence. Ongoing monitoring should focus on observable indicators, including lost tenders, price renegotiations, unresolved data requests and changes in major customer purchasing plans.
Classifying a borrower as a green manufacturer provides little insight into these specific cash-flow risks. The relevant question is whether it can retain orders, substantiate the information required by customers and recover costs without undermining its competitive position.
Financing Adaptation Requires Measurable Outcomes
New lending can support commercially justified equipment upgrades, traceability systems and supplier qualification. Where financing is intended to address CBAM-related vulnerabilities, disbursement conditions and monitoring can be linked to measurable improvements, such as verified input traceability or the successful qualification of alternative material sources.
Banks should also distinguish consultancy and emissions-data preparation from independent verification, preserving the separation of responsibilities where independent assurance is required.
The proposed expansion becomes a credit risk when it weakens a borrower’s ability to retain customers or recover additional costs. Before financing production capacity dependent on European demand, lenders need to understand how carbon-related costs and documentation obligations could affect cash flow, contractual bargaining power and debt-service capacity.
