Today is market-timing day here at MetalMiner. What in the world do we mean by that? We have received numerous emails from colleagues and clients trying to better understand two elements related to steel prices. The first set of questions centers around the most recent steel surcharge announcements and freight adders and the second set of questions relate to the likely rise and timing of scrap prices. These questions lead to one big question on the minds of many sourcing professionals when should I pull the trigger on my steel buy?
So when should one pull the trigger on that steel buy?
Well, if you are a gambler and/or have a good record at the tables, then go for it and try to “time the buy to beat market conditions. Consider what some analysts have said related to timing:
- ITR calls for falling steel prices in 2011 and the near term scrap price rises as “unlikely to be sustained much longer; they call for rising steel prices in 2012
- Credit-Suisse, according to a recent report, predicts the steel markets in North America and Europe to be on the cusp of a four-six quarter rally driven by rising raw material costs and improving demand. The bank also predicts rising prices during the second half of 2011 and into 2012
- Cleveland Research Company sees strength in steel prices during the first half of 2011
With all due respect to these steel analysts (we do think all of these firms are excellent sources of market intelligence), if you don’t find that helpful the next best thing involves creating a buying strategy decision tree. In that post, written over a year ago, one need “only assess the market direction accurately, without the need of actually placing a bet as to the “timingÂ¦Let’s face it, an unforeseen economic calamity such as a sovereign debt crisis somewhere could easily upset the timing applecart, so to speak.
So how should buying organizations think about their steel spend? As we have said previously, in flat markets where the buying organization doesn’t believe prices will move much one way or another, we’ve seen organizations simply bid out their requirements on a quarterly basis, fixing the price to an index. However, we don’t think steel will remain a “flat market throughout 2011.
In falling markets, the strategy above also works though we’ve seen organizations take more last minute decisions to capture every last penny of a declining price. Oddly enough, we rarely see organizations lock requirements forward as markets fall (the notion being, “we want to ride the wave down). Unfortunately, we don’t think steel falls into this scenario either.
In rising markets, where a high risk exists of the price increasing throughout a particular quarter, we’ve seen organizations negotiate a fixed contract sometimes loosely called a resting order to hold prices steady. Larger organizations with significant spend may also have the option of hedging the underlying commodity to “arbitrage the risk so to speak between the supplier’s fixed price and the cost of a hedge. Obviously, this won’t be an option for everyone. The next questions include “how much do I lock and “for how long We’ve seen organizations take a certain percentage of spend “off the table if you will, by locking in fixed price contracts for a longer period of time or for example, against confirmed or known demand.
But are we in a steadily rising steel market? We would suggest otherwise.
So the only other scenario left untouched involves what to do in volatile markets. Perhaps we can come to a consensus here that steel will behave in a volatile fashion throughout 2011. Volatility might indicate deploying the strategy used for “flat markets deploying an index and riding the prices up and down based on the index. Of course buying organizations won’t “beat the market using that strategy, but they won’t be caught holding high priced inventory either.
What do you think?