First-quarter domestic steel prices are heading up again as indicated by Tuesday's second-in-a-row, $30-a-ton price increase by
, which follows previously announced hikes by
over the past few weeks.
The increase is coming off of what we think is a relatively small pickup in demand based on a combination of fear of further price hikes due to surging raw materials, seasonal factors, and near-record-low domestic prices. It's the smoke that is driving the surge, not even fire.
Empty Supply Chain Creates Volatility
Inventories normally cushion these nominal swings in steel demand. The recent uptick in orders is a nominal increase but because the supply pipeline is so empty and lead times for production increases aren't instantaneous the pricing environment is being whipsawed. Sheet prices ran up a whopping 40% from July to October with an operating pickup from 47% to 62%; hardly a market full enough to get any price increase in historical terms.
"Scarcity Signals" Contributing to Momentum
There are already signs of scarcity in the steel food chain. Even at a 64% operating rate -- with plenty of idle capacity -- mills are unintentionally sending a message to their customers that they've become more full in recent weeks by renegotiating existing pricing commitments, slowing deliveries and pushing out schedules, among other things.
Steel Pricing Inelastic; Lead Times a Barrier
One artifact of the 30-year drought in the steel business is that the cost of steel as a percentage of the finished products made out of steel is relatively small. For instance, steel cost 10% of a car's selling value in 1981, today it's around 3%. So availability becomes far more important than pricing.
This Is the New Normal
The net result of a combination of bare-bones inventories with these occasional demand upticks is likely to bring us to a permanent new normal of oscillating steel prices in cycles far shorter than what we've seen in the past. This means more volatility and in some ways more opportunities for those who trade either commodity steel or steel equities. However, this is meaningfully unhealthy for the domestic and global steel industry as it will wreak havoc with production schedules, capital investment, and jobs.
Michelle Galanter Applebaum spent more than 20 years as a managing director at Salomon Brothers in New York and was the No. 1-rated steel analyst from 1988-2003, according to Institutional Investor magazine. In 2003, Ms. Applebaum formed Steel Market Intelligence, a 5-person Chicago-based equity research boutique providing advisory services to institutional investors. In addition to publishing 10-15 reports/week, Ms. Applebaum sponsors numerous CEO-level meetings for her investor clients during the year. She is regularly quoted on Bloomberg, Dow Jones, The New York Times and makes frequent appearances on CNBC and other news programs. Ms. Applebaum lives near Chicago with her husband, visiting children and 2 dogs.