SMU CEO Thoughts on Current Market Conditions

Price becomes irrelevant when your customers need product and there is nowhere else to go. That is what one manufacturing company told me this afternoon. I spoke with manufacturing companies and service centers who pointed out to me today that there is no supply to be had, at least not on the domestic market. At the same time, demand is strong and showing no signs of fatigue or ill-effects from higher prices. This market is all about product availability. If you can get material, the buyers rarely challenge the price.

Michael Cowden wrote an article regarding comments made by Lourenco Goncalves, Chairman, President & CEO of Cleveland-Cliffs (which owns the former AK Steel and ArcelorMittal USA operations) and Congressman Frank Mrvan of Indiana regarding the current market situation, with Goncalves chastising steel buyers for not buying when prices were low last year, along with a discussion of Section 232 tariffs (see article above).

I went out and asked a few manufacturing companies and steel service centers to comment on what Mr. Goncalves had to say, and here is what I heard today:

The purchasing manager for a large manufacturing operation told me, “Not only do I not agree with Goncalves’ opinion, but apparently he doesn’t either. If he actually believed his own words, he would not have made the now famous statement of “Value Before Volume.” Last I checked, price/cost is a component of determining value. So to suggest that the market focuses too much attention on price specifically ignores basic economics and is also counterintuitive to his personal beliefs as he stated them. Further, if ‘everyone should have bought steel when it was plentiful,’ then everyone would also have ignored basic cashflow and working capital objectives and everyone would also have needed a crystal ball to see in advance just how much greed would be dictated into the supply chain. In the spirit of ‘cancel culture,’ a better idea might be to simply cancel Section 232 protectionism for the U.S. steel mills. Then we’d see exactly how much greed there would be when the playing field was re-leveled to where the buyer actually regained a voice in the process….”

An executive with a large service center spoke about why companies did not buy inventory last year when prices were low. “Everyone was of the belief last summer, that in the midst of the worst pandemic in over 100 years, the right move was to load up on steel no matter what, because it was cheaper? I suppose they would have just guessed at the sizes and quantities to buy to cover them for the first nine months of 2021. The reality is quite different; nobody envisioned the kind of recovery we’ve had, especially in automotive and many other industries.”

This same distributor went on to discuss Lourenco Goncalves value vs. volume proposition. “I have a great deal of respect for LG, and think he’s made some bold moves that will serve his company very well. I think his approach of focusing on profits over volume will be a welcome change, and I think he has the potential to make more impact on the steel industry than any others have in over 50 years. Until we get through this particular cycle, it’s too early to make full assessments. Right now, it’s quite easy to make whatever proclamations one wants to because controlling the supply (and thus raising prices) is a pretty simple matter. I DO believe that once this market corrects and returns to ‘normal,’ LG will continue to focus on value/profits and would be willing to take output lower vs. having to participate in low-priced markets. This approach may work for a while for CC, and potentially for the long haul if they remain focused on the upper end, which is what they’re doing. At some point, this model may break down if other players use new assets or more of their assets to chase autos/appliance, etc.”

I found his last comment interesting about what happens to the Cliffs business model as other players (USS using Big River Steel, SDI and their new Sinton facility, and Nucor from various plants) make moves against Cliffs’ auto, appliance and other high-value customers?

For those of you who are unaware, Lourenco Goncalves will be a featured speaker at this year’s SMU Steel Summit Conference in Atlanta on Aug. 23-25. He will be sitting down with me on stage in a fireside chat format to discuss a wide range of topics that I know will be of interest to all of our attendees. You can learn more about our agenda, speakers, speaker biographies, the 2021 SMU NexGen Leadership Award, costs to attend the conference and how to register by clicking here.

For those of you who are unable to travel due to travel restrictions either by the U.S. or the country you reside in (Canada for example), we will also have a “hybrid” option that will allow you to watch the conference on your computer. We will be providing more details on this option within the next few weeks.

I spoke with one of the larger steel hauling trucking companies this morning about what impact the Colonial Pipeline shutdown was having on their business. They told me they were adjusting freight rates up by 10 percent. They also told me at least one of the mills they service is paying a bonus (in the form of extra miles) so they can get drivers to pick up loads.

All of this and steel prices continued their march higher this week (see article above). The SMU Price Momentum Indicator is pointing to higher prices over the next 30 days on all flat rolled and plate steel products.

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