Tuesday, September 14, 2010

Steelmaking and Pricing

I came across this article by Bridget Freas over at the seekingalpa site.

Whilst the article concerns the future of the steelmaking industry from a financial viewpoint, it raises some interesting points with regard to steel pricing.

Historically demand has been the major factor in steel costs with Steelmakers quick to seize opportunities to increase prices in the good times and equally fast at cutting prices to retain market share during a slump in demand.

The following excerpt is taken from the full article which is an intelligently written and thoughtful report

Prices Are Not the Indicator They Once Were

It used to be that higher steel prices came from stronger demand, as supply was relatively fixed in the short term. This is no longer so. First, in recent years, steelmakers have increased their ability and willingness to adjust production to meet demand, so supply has played a greater role in determining prices than it has in the past. Second, steel buyers and distributors have improved their working capital management, and are able to operate with much smaller inventories than in the past. Therefore, short-term supply changes can have a much greater impact on steel prices by creating the impression of a shortage when the supply chain is lean. Given the degree to which higher-cost inventories weighed on the earnings of steel mills and steel buyers when prices tanked in late 2008 and early 2009, lean inventories have become de rigeur.

Whilst raw material costs (particularly iron ore) were important factors in driving up prices during the first half of 2010, the management of production levels by the Steelmakers has played no small part. As demand grows very slowly it is unlikely that we can study past trends looking for price indicators, but if I were a betting man I would not risk “a punt” on steel prices falling.


Technorati Tags: ,


No comments: