Final Thoughts
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Letter to the Editor: Accounting Is Not a Trick
Written by Tim Triplett
January 17, 2022
I was reading your Final Thoughts and appreciated most of your comments, but I have some major issues with the inaccuracy of this paragraph.
“Accounting tricks like inventory write-downs can help narrow the gap between a service center’s cost for steel and what a customer is willing to pay for it. But some losses are inevitable, at least until the price declines begin to plateau.”
(See Tim Triplett’s Final Thoughts on Jan. 16.)
Writing down the value of inventory before it is sold is not an accounting trick. How is recording a loss an accounting trick? Ignoring a loss is an accounting trick.
When a company writes down the value of its inventory, it is recognizing a loss before it is sold. If it buys a coil for $2,000/ton and it is only worth $1,500/ton at some point later on, it is required to recognize that loss at the time the market value is lower than the cost. If a company does not do this, it is overstating its income.
What many companies have done in the past is to ignore these market movements, hold onto the expensive coils in the hope the market would move back up, and flip new steel that it is buying closer to the market – making it appear they are making margin and ignoring the large losses that it has yet to realize in its inventory.
In markets that have had extended negative market fluctuations, this has killed off several companies when ultimately the old expensive inventory became too old to be eligible in the company’s borrowing base or had to be marked down.
By not marking its inventory down correctly, a company is reporting an inflated balance sheet, inflated borrowing base and an inflated income statement.
Service Center CFO
(Name Withheld on Request)
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Tim Triplett
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Final thoughts
SMU has heard from some larger buyers who have stepped back into the market to buy at prices that, if not at a bottom, they assess to be close to one. Is it enough to stretch out lead times and send prices upward again? Or do we continue to scrape along the mid-$600s per short ton (st) as we have been doing for most of the last month?
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Final thoughts
Cleveland-Cliffs Chairman, President and CEO Lourenco Goncalves had some insightful things to say today about the steel market and about a conference we suspect might be Steel Summit.
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Final thoughts
They say a picture is worth a thousand words. Well, when you add in some commentary from respected peers in the steel industry to those pictures, that may shoot you up to five thousand words, at least. In that spirit, we’ve added some snapshots from our market survey this week, along with some comments from market participants.
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Final thoughts
I thought we’d have more clarity this week on Section 232, Mexico, and a potential carve-out for steel melted and poured in Brazil. As of right now, the only official comment I have is from the Office of the United States Trade Representative (USTR).
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Final thoughts
There are just 40 days left until the 2024 SMU Steel Summit gets underway on Aug. 26 at the Georgia International Convention Center (GICC) in Atlanta. And I’m pleased to announce that it's official now: More than 1,000 people have registered to at attend! Another big development: The desktop version of the networking app for the event has officially launched!