Earlier this week, Steel Market Update wrote an article regarding the quick run-up in hot rolled, cold rolled, galvanized and Galvalume steel pricing. We wanted to focus industry attention and debate on the "Big Bang Theory" which is circulating amongst industry experts. The "Big Bang" referring to the steel pricing bubble bursting.

Here is an excerpt from our December 17th issue of Steel Market Update. The full article can be read in the "steel news" area of our website if you are a registered member or trial subscriber:

“The higher it goes the harder and faster it crashes” (John Anton, IHS Global Insight)

As our readers know, Steel Market Update (SMU) is a strong advocate of maintaining an industry wide dialogue. Through the sharing of ideas we all get stronger and more competitive as companies or as individuals with jobs to perform within the industry. The sharp rise in steel prices which began on November 1st innocently enough has now morphed into a life of its own over the past 18 days.

Two Industry Experts Say “Bubble”

Few of the conversations we have are in support of higher prices. Buyers understand the need for mills to make money but, as the numbers continued to move it’s become “crazy” as more than one buyer has told us this week. A scrap dealer pointed out to us earlier this week “…now mills are raising prices in anticipation of scrap price increases”. He pointed out the historical norm is for the steel market to react to new scrap prices “after” they come out. One area of agreement is “steel price volatility is here to stay” and those of you who are not tuned in on a weekly or daily basis may have a difficult time navigating the steel seas in the months to come.

Common Sense Says…

Our conversation with the industry began earlier this week when SMU was discussing the latest price adjustments being made with one of our industry experts. Their replies to our questions came back fast and furious:

“The test for the mills will come as early as Mar lead time for the integrateds [integrated steel mills] and Feb lead time for Mini-mills, hearing SDI just clearing 1st week Jan!! In this environment they may not see real traction for that lead time until Feb.

Clearly scrap will be up for Jan (already expected when Dec was expected up 50), but 50 up in scrap in not unusual when things are tight. The only unusual component in this whole process is the extent to which the mills jacked the price. Clearly they didn’t want a repeat of what happened last year when cheating kept CRU “lagging” the whole way. Intuitively just because they raise the prices faster doesn’t mean the CRU will get to a higher level than it should only that it might rise more quickly. If it does work for some reason, logic would suggest that it will fall that much more quickly as well unless demand surprises.

Demand has to surprise here in order to give legs to the increases. By raising prices so fast they’re going to test that demand increase scenario almost right away. Any sign that’s possible with current auto inventory issues? If I hear one more person use the last 3 months steel sales volume as evidence that things are getting better I am going to have to start giving a course in common sense.”

IHS Global Insight Steel Pricing Expert: John Anton

As I was carrying on a conversation with the above industry expert I got a call from John Anton who is the steel pricing expert for IHS Global Insight.

Those who attended Steel Market Update first steel conference in Las Vegas in October got to see Mr. Anton speak and are therefore aware of his opinion that steel prices should not be running up at this time. Mr. Anton discussed scrap prices with SMU and he scoffed at the notion that scrap prices should be as high as they are today. “If you add domestic and exports of scrap together the number is still very low, higher than 2009 but historically low.” He pointed out, “…steel prices have gone up more than scrap prices.”

“You can’t always use the past to predict the future,” he went on. “In the past whenever there has been a time like this idled capacity comes rushing back online. The mills are not going to keep disciplined on production.”

He predicted to SMU: “Supply comes back online by April” and, “Domestic prices will attract imports.”

By April, he told us, “people will be using sheet steel to wrap casseroles.”

Big Holes Starting with March Lead Times

Now we are back with our first industry expert who has been making a case the domestic mills order books will start having “holes” come March lead times. Our expert believes the steel buyers have covered their needs thus the healthy volume of orders for November and December. “…raising prices again will be the key to achieving even the current increase, but only if people really need to buy. Even then, however, they will buy from distributors who are long cheap metal where possible, not mills, and mills will have literally turned off the spigot on buying.”

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