August 29, 2012

Volatility returns with a vengeance to steel prices

View from the Board | Norm Streu

After almost two years of relative steel market stability, volatility has returned with a vengeance this summer.

The roller coaster ride of the past three months has demonstrated again the extent to which current global economic dynamics have made steel pricing wildly volatile, and nearly impossible to predict.

In late spring 2012, scrap prices declined globally.

This was driven by the overall weakness in commodities during this time, which in turn was driven by rapidly falling demand in Europe, China and other emerging markets.

Since scrap is the input product for steel, many buyers were pushed to the sidelines in anticipation that steel prices would also decline.

However, for the most part mills pocketed the scrap price reduction, and passed on only a small price reduction to buyers. Buyers across North America continued to hold off purchasing steel, believing that falling scrap prices would eventually mean that the mills would have to drop their prices.

Unfortunately, when all buyers refrain from buying, pent up demand slowly builds, as the buyers work through their inventory.

Eventually, these buyers have waited as long as they can for prices to go down, and they all head to the market to buy at roughly the same time. This results in a sudden spike in demand, and a resultant spike in prices.

This appears to be what has happened this summer.

After several months of falling scrap prices, the prices suddenly spiked dramatically.

In response, domestic mills almost immediately announced a whopping $80 per ton increase on long products. Steel prices jumped 10-12 per cent almost overnight. The question now is whether the domestic mills can maintain this increase. Once buyers fill the immediate needs of their inventory, it is likely they will refrain from purchasing to see whether this spike will hold.

For their part, mills will do everything within their power to maintain the new pricing, as they need a return to greater profitability after four disappointing years.

What is the likely outcome? Unfortunately it is nearly impossible to predict.

Steel buyers like LMS have no choice but to operate under the assumption that the new pricing will hold, and plan accordingly.

But, the only thing that is certain is more uncertainty, and more unpredictability in the global steel market.

Norm Streu is the president and chief operating officer of the LMS Reinforcing Steel Group. He is a former chair of the Vancouver Regional Construction Association and a member of the Journal of Commerce Editorial Advisory Board. Send comment or questions to editor@journalofcommerce.com.

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