Predicting Steel Price Movement

As a former steel buyer I was challenged to write an article about trying to find a way to predict future moves in the steel market. So, here goes, but, be aware that if I really knew how to do that I’d be spending this winter on the beach of my personal island in the South Pacific rather than writing this article from in my home in Rhode Island.

The problem with predicting future events can be summed up in the following quotes.

“The future ain’t what it used to be.” YOGI BERRA

“Always in motion is the future.” YODA, Star Wars Episode V: The Empire Strikes Back

“Prediction is very difficult, especially if it’s about the future.” NILS BOHR

“Telling the future by looking at the past assumes that conditions remain constant. This is like driving a car by looking in the rearview mirror.” HERB BRODY

Here is an example of faulty forecasting logic: Every year the Steelers won the Super Bowl, the stock market rose averaging over 18 percent.  Should Wall Street root for the Steelers or is this just a six-time coincidence?  The problem is that any set of data will have low-probability coincidences that seem to be significant and predictive.  However, they are not significant; they just happened by chance.  It is a very difficult matter to find data relationships that actually mean something.

For instance, it might be that cold and stormy weather causes steel production to slow down (this certainly is true for the availability of scrap).  Supply then constricts and if all other factors remain constant then prices go up in the winter.

All other factors don’t remain constant though.  Mills had a very difficult time with ice last year, so this year they probably planned to have more raw material on hand.  Further the weather, so far, has been fairly benign.  Finally there is an increase in imports.  So perhaps this year there will not be a winter increase on steel pricing.

So what factors do I suggest a buyer look at to assist in predicting the future price of steel?

Item number one is the futures price of steel (HRC on the CME) and the commodities that go into it (iron ore, metallurgical coal, scrap, etc.).  After all there are many millions of dollars being bet on these prices and representing the sum of the market’s overall judgment of what is going to happen next. Steel Market Update publishes the CME HRC Forward Curve at the bottom of its home page and, every Thursday evening they have an article written by active buyers and sellers of Futures, Swaps and Options in their newsletter.

Item two is service center inventory levels (as compared with past average amounts).  The mills look at this number closely when thinking about where pricing should go.  If you see inventories dip you can be sure the mills are thinking about price increases. Steel Market Update analyzes the MSCI data and has their own inventory model for flat rolled which identifies whether distributors inventories are in “excess” or “deficit” and then forecast what direction inventories are headed. This is one of their Premium level products

Item three is mill capacity utilization and the related mill order lead times.  Mills have more discipline than they used to but if lead times shorten then prices are likely to fall. Steel Market Update publishes the weekly and monthly raw steel production reports associated with the American Iron and Steel Institute (AISI). SMU also surveys the flat rolled market twice per month and develops an average lead time by product which is then shared with their newsletter readers.

Item four is the rate of foreign steel coming into the US and, in particular the amount coming into your area of the country.  If import licenses are high for the next few months you can bet that prices will stay low. Steel Market Update has a number of ways of reviewing foreign steel imports including watching weekly license data and then comparing that data against prior months. SMU writes articles regarding imports in both their regular newsletter as well as their Premium supplemental issues.

Item five is the weather.  Bad weather shuts off supply more than it dampens demand.  In fact bad weather can spur future demand especially in construction.  Sometimes a buyer can anticipate sudden price movements in the market just be being on top of the weather forecast.

The final item is demand.  Steel demand from one year to the next is generally based on overall economic growth although segments can have their own dynamic (i.e. oil or dumping suits to stop imports).  Also, China drives the global market; any effect there is going to be felt here with a lag of about 3 months due to shipping lead times. SMU follows demand for a number of key industries: automotive, construction, energy, service centers, agricultural in the U.S. as well as demand in China.

No forecasting system is fool proof so no one really knows what the future price of steel will be.  That said, occasionally, all the above factors line up and it’s a good bet (but still a bet) that the market will move.  Right now with the rise in the value of the dollar and the drop in energy prices I think steel prices are going down. You may want to review Steel Market Update “Key Market Indicators” (which is a Premium product) as well as their write-ups regarding the value of the dollar versus the currencies of various steel trading nations (also a Premium product but occasionally shared with regular newsletter readers).

Finally I have one last piece of advice, there are market players out there who are very sophisticated and have extremely good information.  If you can find out who these folks are and follow what they do you might get an edge.  But be warned, no one is right about the future all the time so make sure you think through the risks on any bet you place on the future price of steel.