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As the oil industry has come back up so has steel pricing. Although the two have very little connection on a global scale. In fact, steel pricing has varied recently more in line with most other commodities: that is, it crashed.
And being in the energy sector, we tend to forget how little steel is consumed by our industry as compared to the world as a whole. Everything from automotive to aerospace, heavy industry to construction demand impact one side of steel pricing. And that’s just the demand side: we will talk about the supply side below.
Obviously, FSM tracks leading indicators for steel pricing as closely (or more closely depending on the day), as we watch oil prices. For example, our pricing is based on a number of factors, including cost of material on hand, inbound replacement cost, demand for particular sizes/grades, and of course, where we project prices heading.
So despite the fact that I have hesitated in the past to discuss steel pricing, I thought you all may appreciate a few notes on what we’ve been seeing in the market.
First, raw material costs (and in this context, I mean the cost of making steel) have, for the most part, increased substantially over the trailing 12 months. Scrap increased from $228 / GT to $342 / GT. Nickel went from $3.96 per lbs to $4.97 per lbs. Natural gas from $1.90 to $2.63.
In other words, for mills, the cost of making steel is going up. Many mills price on two things: base price and alloy surcharges. Base pricing has seemed to stay level, although, some mills have had slight price increases. However, we have seen allow surcharges jump as much as 50% from January to February. Some mills charge at date of order, others charge at time of shipment. For some of our all-inclusive mills (they don’t break down base and allow surcharges), pricing has gone up as much as 9% in one month.
In addition, all of our mills appear to be building backlog. As many of you know, FSM sources worldwide. Some of our domestic mills have added an additional 30 days of backlog over the past month, and we have seen our international partners similarly building backlog. What this indicates to Five Star is that there is a possibility base pricing will increase in the coming months as building backlog generally makes mills more willing to lose business.
Of course, some of this is based on a resurgence in oil and gas, but not most of it. Many distributors, still shell-shocked after the beating we took over the last two years, remain gun shy. But for many mills, oil and gas is only a small portion of their overall business. One of our mills, for example, limits energy to 30% of capacity. They simply will not take on more work than that. It is their assurance of continued diversification. Rather, improving economies around the world are driving increasing demand for steel.
And finally, Chinese steel for a long time has caused steel pricing to remain at depressed prices. Recently, China announced that they would cut steel capacity by 50 million tons as part of their efforts to reduce pollution. By 2020, the government said it aims to close 100 million – 150 million tons of steel capacity. While this announcement is doubtful to have any short term impact on world steel pricing, it nevertheless indicates some diminishing supply that will, overtime, impact pricing.
As the world economy improves, steel demand is set to improve. And while steel pricing has historically been relatively stable, and we expect it to continue to be, the indications we have all seem to point to a steady rise in raw material pricing.
While there are certainly still good deals out there to be had (we, for example, have certain sizes that we are still taking a loss on to move), those bargains will evaporate over the coming months as supply gets tighter and tighter and as mills and distributors move from being concerned primarily with generating sufficient cash flow to generating actual revenue.
By: Ty Chapman
Five Star Metals, Inc.
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