Let’s Start a Conversation – Managing to Metrics or Acting on Gut

“This market is the most interesting I have seen in 40 years. By looking solely at metrics, it would appear that pricing could run up another $100 per ton in the next two months. Looking at futures, it would appear so. Listening to the mills, it would appear so. Section 232 could be the icing on the cake for $800 HR to become a reality in Q1.

“Extreme cold weather will play a role in production efficiencies and scrap collections, and it has been a long time since we have seen a blast furnace go down.

“Raw materials trading at very high numbers, wage pressures, inflation looming, new tax laws, and a record high stock market may all be leading to some irrational exuberance.

“Does this market have strong enough legs to last beyond Q2? Do we see the historical price runup this year for 6-8 months, then deal with the fallout from prices crashing? Will history repeat itself? Could this be the next ’04, ’08?

“How long until we see ‘allocation’ on some products? Or, is this market a flash-in-the-pan that peters out in 90 days?

“As you have stated, it appears most service centers are in a solid inventory position right now. Imports appear to have abated and aren’t that attractively priced. So, it appears to me that the next ‘buy cycle’ will hold the answer to where this market is headed and for how long. When current inventory is consumed, will the next wave of buys be as robust? Will service centers continue to be conservative on their buys and inventory since pricing will be at high levels? Will futures begin to show weakness in Q2, or do they remain at current or even higher numbers? Do we see iron ore, coking coal and scrap continue to rise? Will steel pricing follow oil pricing?

“I remember thinking in 2004 and 2008, ‘prices surely cannot go higher,’ but they kept doing so, month after month. In both those markets, I also remember thinking six months into the euphoria, “what goes up, must come down,” and in both cases it was painful when that happened. This market is still cloudy to me, I am conflicted between managing to the metrics and/or acting on gut feel.

“This time around I think we will see a more conservative approach to the market conditions. Don’t go to either extreme, manage to the middle and navigate nimbly. I think we will be fine if people don’t act out of panic or fear. Manage what you can control.”

Service Center Two:

“I agree with a lot of what was posed. I think the most important factor to watch near term is lead times. They can and will be affected by weather, and every other factor, and thus the lead time becomes the one measure that provides the window into everything (assuming they are accurate). The last market price peak post-2008 was $888 per ton in March 2011. I think it’s possible we might test that level if we see new government trade restrictions implemented with teeth.

“One major difference this time around is the heavy percentage of supply contracts that are in place with the mills. There’s much less spot business required by the mills to fill order books compared to the past. So, mills have much more reliance and flexibility with the known ‘cushion’ of regular tons that will flow in regularly. They can manage forward or backwards as they choose, depending on market conditions. If we get a market where buyers smell fear and pad orders, double book, etc., then mills will be raising prices at will, and lead times could really shoot out. At some level, imports will get attractive, but what if they’re not really available if new restrictions come?”

Service Center Three:

“I do not believe we will see $800 HRC. Considering the short lead times and current service center inventory levels, I seriously doubt the mills can collect much if any of the recent increase. On a positive note, the import license data indicates a fairly significant reduction in flat rolled arrivals in December. If we assume this trend continues, there is the potential for a legitimate strong market environment to develop later in Q1, particularly if Trump follows through on his 232 commitment.”