Letter to Editor: Volatility & The Lag Effect

While we (and probably most other distributors) are happy to see a more economically sound steel price, our customers are not healthy with demand.  At one point I correlated that the higher the price for steel, the more money CAT made.  The OEM’s have different circumstances, and the rise in steel prices is not welcome in their demand short environment.  A key challenge is for distributors is to help our clients navigate a quickly changing market (that they are reluctant to accept), while restoring our viability with higher prices.

Since much of the 2016 rally comes from surprising circumstances in China, the market is just waiting for a reversal.  A reversal will come.  It takes swings in both directions for volatility.  However, even if Thursday was the top in China, and Friday marks the change in direction,  there would still be a lag before the US turns. That lag is effected by the price and availability of imports, the world scrap market, and the dollar’s value.

There is still a good deal of upside risk on the supply side.  That would be production stoppages at USS Canada or Essar, or labor issues at AM.  Or, some unplanned outage in an increasing lead-time environment (why USS BF issue catches such a buzz).  These are much greater in likelihood than the idea USS, AK, or AM adding back melting or finishing capacities without renewed energy sector consumption.  AM, USS, and AK have repositioned their business to avoid a $350 price.  So, what’s the new floor price?