Are Low Prices the Double-Edge Sword that Threatens Your Supply Chain?

Written by John Packard

“Today I am going to be Chicken Little” is how John Anton of IHS Global Insight began his presentation at their 7th annual Pricing & Purchasing Summit. The reason behind his comment was his forecast for 2014 called for a modest rise in steel prices in early 2014 before flattening out. The Chicken Little part comes in when he told those in attendance, “If prices don’t go up you will need to worry about your supplier’s viability.”

He also pointed out when there are interruptions in the supply chain it always leads to higher prices and more volatility.

The IHS Global Insight steel forecast calls for 2014 steel prices to rise by approximately 10 percent above the 2013 average “which will hurt your budget but not crush you.”

The elephant in the room is China which now controls 50 percent of the global steel market (and growing). Mr. Anton suggested during his talk that China has the ability to produce 960 million to 1.10 billion (with a “b”) metric tons of steel on an annualized basis. He told the group that China is currently on pace to produce approximately 800 million metric tons this year and price support levels in China are in balance with demand at approximately 680 to 700 million metric tons.

Anton’s forecast is based on China cutting production – something he thought would have happened earlier this year but to date has not. “The average profit per ton is less than a dollar. It’s less than a bowl of rice.” In the past the Chinese mills have reacted to poor domestic pricing by cutting production. With most of the mills making a loss and the Chinese economy growing at 7.5 percent rather than 10 percent or higher, Mr. Anton believes the Chinese mills will respond and shrink production.

IHS believes the reason the Chinese mills continue to operate and over-produce is not from government subsidies but rather through loans from the banking system. The bank loans being made are not being repaid and eventually will need to end. Once the loans dry up the mills will close the next day.

The rest of the world have been attempting to keep supply from overtaking demand which in turn has helped to keep prices relatively stable this year. The issues of price increases in the United States were attributed to supply disruptions (AK Steel, USS Lake Erie, etc.) and that the market has too much supply if it were all up and running. Anton said the domestic mills are aware of this and are trying to be careful not to bring too much capacity online when it is not needed.

If the Chinese do not cut back on production, Anton predicted by late 2014 or by early 2015 steel companies will begin going out of business. Supply disruptions are a huge risk to those buying steel. The point being for this conference that buyers need to have a longer time horizon when making supply decisions and weigh the risks which could impact supply in North America in the coming months.

In his pricing forecast Mr. Anton told the conference, “Downside [price] risk is very minimal. There are better odds of prices going to $700 than $620.”He suggested now was a good time to lock in steel prices…

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