There is an old adage many business owners keep stored in the back of their minds – do you work on your business or in your business? Of course the “correct” answer typically points to an “on” rather than “in” but for this week, I have the pleasure of working “in” the business as our amazing editor Taras Berezowsky enjoys some paella and sun in Barcelona for a much-needed week of R&R.
And when I have the opportunity to work “in” the business, I can’t help myself but dive headfirst into steel pricing trends.
So that got me off into reading many a research note this morning.
I like to read research notes because it helps me cross-compare what others have to say about price trends and then of course question whether or not their assumptions (and my own) make sense. Let’s take for example a recent S&P research note on the steel industry in which they gave a “neutral” rating (we’d concur by the way). What we find most interesting, however, involves the set of assumptions the analysts use to make their case.
For example, this particular research note anticipates rising durable goods demand based on forecasted real growth of GDP and specifically a .5% higher GDP in 2013 vs. 2012:
But based on the chart above, I have a hard time making that assumption. Call me crazy but last year’s GDP looked a little volatile. Predicting .5% GDP growth looks like nothing more than a guess to these eyes.
The second assumption that the S&P research report makes involves auto sales growing to 15.6m units in 2013 vs. 14.4m in 2012. MetalMiner believes these numbers look too rosy. Our own auto index monthly report suggests that auto sales hit their peak back in February when average monthly sales exceeded 15 m units.
So scratch 15m units!
The report makes another assumption about distributors adding more inventory in 2013 vs. 2012. We actually have no basis for an intelligent assumption here as we don’t subscribe to MSCI data or review monthly inventory levels too closely but we do know this – the second a service center notices customer order books slowing, the buying stops. We simply don’t see a case for an inventory build over 2012 levels. Call it a gut feel or just plain intuition but if someone put a gun to my head and asked whether or not distributors would add more inventory or not, I’d say not.
Ironically, the offsetting factors mentioned in the report make a whole lot more sense to us. We buy into a deceleration of non-residential construction this year (that has already started to happen) and we also buy into the commentary about the need for a “permanent reduction in domestic capacity or a drop in imports,” to maintain price and profits.
But since neither of those have happened (May imports actually grew from April’s which were higher than March’s which were higher than February’s you get the picture) we find ourselves concluding the steel industry faces some weakness.
So like my husband, the analysts and I often end up with the same conclusion, but get there from two separate roads.