In my earlier post, I ran through some of the supply factors that relate to the stainless market and offer clues as to price direction. Clearly, capacity utilization (and line re-starts) will negatively impact stainless pricing, but the raw materials equation remains a mixed bag. So perhaps we have a draw, or we can argue prices may drift lower.
Let’s now examine demand and see what the crystal ball has in store for us. In the blue trunks, weighing in at a lean 185 pounds, we have Joe “Rise-In-Prices” Jones, who in the US remains well-supported by automotive demand, aerospace, energy, mining, electrical power and durable goods demand (even the food service equipment guys say demand looks good). In the red trunks, weighing in at 186 pounds, we have Tom “Drop-in-Prices” Taylor, who trained heavily with construction-industry weights, an EU recession and the threat of cheaper imports.
Lower Prices Inevitable?
We see a few other variables that tea leaf readers will not want to miss. In particular, we like to pay special attention to both lead times (lengthening lead times, of course, indicating greater demand, and subsequently, prices) and distributor inventory levels – the latter we look at in the context of a couple of lenses.
The first lens includes distributor inventory levels as compared to historic levels. From this perspective, distributors have less stainless inventory than the historical average (according to Longbow Research: “On average, seasonally adjusted MOH declined to 2.3 in November, which is below the historic mean of 2.7. Flat rolled inventories are currently at 2.2 MOH versus a historic mean of 2.4 MOH.”) The second lens involves examining the specific products that shipped. Here again from Longbow, stainless shipments increased by 3 percent in November.
Inventory in general serves as a double-edged sword. If inventories remain lower than the historical average, one might assume the supply chain will need to re-stock, hence demand will rise. If inventory is higher than the historical average, then “burning it off” so to speak lowers demand and hence pricing. Today’s situation — with slightly less inventory than historical averages — may imply that provided end-user demand stays exactly the same as it did in November, for example, then the supply chain would need to re-stock, potentially creating a lift in pricing.
All of this talk might appear as mumbo-jumbo. But commodity volatility has taught us — and hopefully some MetalMiner readers — at least two lessons, only one of which bears repeating here now: small upticks in demand create disproportionate price increases. We won’t venture into 2013 economic forecasts (we’ll save that for another post), but the first half of 2012 looks pretty good from our vantage point.
I’d postpone the bargain-basement shopping until at least toward the back half of this year.