Steel prices: A story of volatility and misplaced brainpower

During The FABRICATOR’s Leadership Summit in early 2018, speaker John Packard of Steel Market Update (SMU) and fellow FABRICATOR columnist placed his iPhone on the podium and kept checking it throughout his talk. Section 232 tariffs were announced the day before, and the details kept changing literally by the minute. The panel discussion—involving steel mill industry leaders, analysists, and lawyers—couldn’t have been timelier.

Panelists espoused predictable views. Ladd Hall, executive vice president of flat-rolled products at Nucor Corp., said that the steel industry had been in a trade war for years, and that the U.S. was at long last fighting back. At the opposite end of the opinion spectrum, Lewis Leibowitz, a prominent trade and customs attorney, called tariffs a “blunt instrument” that could lead to unintended consequences.

How did fabricators in the audience feel? The response was mixed. Some felt the steel industry should let free trade reign. Others supported the steel mills’ efforts, with the view that a strong domestic steel industry is foundational for a modern industrial economy.

Two years on, have our worst fears come to pass? Are those who buy metal facing a cash flow crisis? Are global supply chains collapsing? Nope. But it’s not all rosy, either, even for steel mills.

“Challenges remain. No one can claim victory in the war of global overcapacity, and China is the base of the problem.”

That was Thomas Gibson, president of the American Iron and Steel Institute (AISI) at the SMU Steel Summit, a meeting of more than 1,000 industry stakeholders held in late August in Atlanta. Gibson added that imports from China have indeed decreased, “but other countries are filling the gap. In fact, we’re seeing increasing steel imports from other countries, and many of those countries import steel from China.” Steel finds a way.

At the same time, mills are plunging deep into capex, modernizing their facilities and making them more efficient than ever. As touted by the steel executives at the SMU Steel Summit, the mills now are in a position to put cash back into the business.

Meanwhile, fabricators and other metal buyers face volatility. Donald Bly, another presenter at the SMU Steel Summit, brought this problem to the fore. Bly, a partner at New York-based Applied Value, leads the company’s sourcing, supply chain, and raw material practices.

His first slide during his presentation illustrated the steel-pricing roller coaster over the past two years—a steep rise in the CRU U.S. hot-rolled steel price index through the first half of 2018 followed by a decline through much of 2019. Along the curve he placed signposts, when Section 232 tariffs were implemented in early 2018; when the Mexican, Canadian, and EU exclusions ended in mid-2018; and the drop of tariffs against Mexico and Canada in early 2019. Over the CRU was a dotted line showing an (unnamed) example of OEM quarterly indexed contract pricing, which was lower than the CRU in 2018 but higher than the CRU as of midsummer 2019.

“Many manufacturers have been very public about their businesses and the cost of volatility,” Bly said. “If steel goes up $100 a ton, what does this mean for my business … what does this mean for the margins of finished products?”

Over the years covering this business, I’ve seen more than one business card from an OEM’s purchasing agent or manager with the title “Commodities Buyer, Fabricated Metal,” or something similar. Custom metal fabricators everywhere fight commoditization. Price is important, but it’s tough to grow a business by offering the lowest price every time.

Considering the behavior of steel pricing in recent years, fighting commoditization has been an uphill battle. Bly illustrated this very effectively in one of his slides that showed price volatility going back to 2002 and the monthly price changes. China becoming a net exporter in 2004, the auto industry collapse in 2008, oversupply in 2016, and of course the 232 tariffs in 2018—all of it and more made steel prices as volatile as ever.

“Each one of these spikes [in volatility] pushes steel more and more into commoditization, like oil and currency,” Bly said. “And it’s difficult for manufacturers to manage that volatility.”

I’ve talked to some fabricators who are good at hedging and who reaped the rewards through 2018. An operation with purchasing prowess can build a competitive advantage. Yet many of those same operations ended up being hurt in 2019 as spot prices fell. It ended up being a wash.

But if you look at the big picture, volatility really doesn’t have much of an upside. Sure, smart purchasers and traders can make the right bet, aided by sophisticated data analytics systems. In fact, Bly said that many OEMs have been successfully mitigating the material price fluctuations thanks in part to software analytics.

But it’s a shame to see all that time, brainpower, and technology go toward managing price volatility. Short-term benefits outweigh long-term progress, and only those who make good bets reap the rewards. Customers usually don’t get a better product, just a cheaper one.

What if all that time and energy were placed into basic R&D, product development, or other forms of business development? What if the power of software analytics were directed at shop floor problems or product design innovations?

Fabricators can manage volatility. If they couldn’t, they probably wouldn’t be in business at this point. But I’m guessing that few entered this business just to bet on the future price of steel.