SMU Community Chat: Jeremy Flack Talks Managing Risk

We’ve always had cyclicality, but the cycles are much higher and lower, Cowden said. “Why were the last three years more volatile? It’s not like they weren’t before. We had volatility around Section 232 and the financial crisis, but that looks like nothing compared to what we’ve experienced the last three years.” 

“We’ve talked about being volatile, but I don’t know that the industry has quantified it very well,” Flack responded.

“We can speculate on reasons. It feels really good to buy when the price is going up, and really bad when the price is going down,” he added. “We look at this from a statistical standpoint and we’ve looked at the industry over a period of decades.”

He then delved into a historical overview of how dynamic steel pricing has been.

From 1994 to 2004, the US saw the rise of the EAF. Adjusted for inflation, the price of steel was $470 per ton on average during that period, with a standard deviation of $93 per ton. Then China experienced a steel boom from 2004-2020. That drove raw material price sharply higher, and steel averaged $657 per ton with a standard deviation of $125. From 2020 to the present day, the industry has seen consolidation and restructuring. We’ve seen growth in EAFs and the average price of steel has gone up to $1,043 per ton on average with a standard deviation of $470. The drastic swing above or below the average price contributes to market volatility. 

Looking at futures and tradability, he said a big challenge for organizations is determining how to deal with price movement and how to formulate a strategy for buying optionality and stabilizing your business.

With the recent banking woes creating tighter credit situations, which affect companies like service centers and original equipment manufacturers, there is concern about market volatility in the future.

“We call it the steel risk trifecta,” Flack said. “Steel prices, plus interest rates, plus increasing volatility, leads to businesses carrying the least amount of inventory as they possibly can. The industry response right now is having as little inventory as possible. But that leaves us all exposed to having no inventory if something happens.”

Flack went on to discuss his investment in the recent acquisition of Fabral, asymmetric risk, and answered more questions on the future of the Flack brands.

If you’d like to learn more about Jeremy Flack, head over to his SMU Spotlight.

This is just a brief glimpse of the conversation. To view the full webinar, click here.

By Becca Moczygemba, becca@steelmarketupdate.com