In early October I received a phone call from a well-known consultant/advisor within the domestic steel industry. He wanted to know if we were urging our readers to begin to hedge steel (meaning immediately hedge, as opposed to creating a hedging program).
My gut reaction to the question was to dodge it because I wanted to understand why he asked it. Our conversation went along the lines of this:
Him: Hi, Lisa. I heard you speak at the recent Steel Market Update event. I was just wondering if you were urging your readers to hedge steel.
Me: Why do you ask?
Him: I think there is a lot more steel price upside risk than downside risk.
Me: I don’t disagree with you, in that prices are on the low end of the range relatively speaking, but in answer to your question, no, we are not telling our readers to hedge right now.
Him: Why not?
Me: Because we don’t see signs of a market bottom. Prices would have to stop falling and begin rising, crossing certain levels before we’d suggest companies hedge.
Him: So you don’t see upside risk?
Me: We don’t try and time the absolute lowest point of the market and then lock-in. We try to identify when the trend has shifted (from bear to bull) and take cover, then buy forward or hedge. Until we see evidence of a trend shift — and the market still looks negative to us —we don’t pay much attention to upside/downside risk, per se. It’s not relative in driving industrial buying behavior.
Is This Analyst Wrong?
That’s probably somewhat of an irrelevant question. He can be both right and wrong. Right in that, yes, there is likely more upside risk (e.g. steel can likely go a lot higher vs. a lot lower) but from an industrial metal buying perspective — I give it the big SO WHAT? (more…)