Final Thoughts

Yet despite all that, demand (with the exception of automotive) remains pretty good. That’s what our survey results show, and that was certainly the feedback I got during the presentation and on the sidelines of the event.

Another big topic along the sidelines was how shortages of chips and other basic parts are causing trouble not only for the automotive sector but all along the supply chain– from big appliance and heavy equipment producers all the way down the line to smaller job shops.

The question I have is not whether inflation will cause demand destruction. I think there is a good case to be me made that markets are adjusting to the initial shock of the war.

We have seen steel price increases moderate significantly over the last couple of weeks. Yes, it’s possible that prices will shoot upward again if scrap settles a lot higher. But I think it’s also possible that prices will level off and decline as more imports come into the market, as new domestic capacity comes online and as new sources of pig iron are developed. Even energy markets – whipped into a frenzy following sanctions (or the threat of sanctions) on Russia – appear to be normalizing.

Also, I’ve flagged it in past Final Thoughts, and I’ll flag it here again. Steel prices in the US and Europe have skyrocketed on the war. Prices in Asia, not so much. That’s no doubt in large part because of a severe Covid outbreak in China.

Prices in different parts of the world are rarely the same. But they usually trend together. And so I would expect prices in Asia to move up should Beijing – as it has in the past – roll out stimulus to offset the economic toll of lockdowns.

In other words, I would expect prices in Asia to rise and close the gap with tags in the US and Europe. But if that doesn’t happen, well, then it’s price in “the West” that might have to come down.

My biggest concern, though, is not prices. It’s the persistent parts and labor shortages and the delays those have caused. I’ll use this example: My youngest daughter was outgrowing her kids’ bed. We needed a new one, and so I ordered one. And then waited. For days, then weeks… And then my daughter was simply getting too big for me to wait anymore. So I canceled the order – something I don’t like to do – and bought one Macy’s had on the floor.

That’s anecdotal. And anecdotes are of limited use. My point is this: Demand might be strong now. But how long are people willing to wait for companies to meet that demand? In other words, if demand does take a turn for the worse, I wonder whether it will because prices have gotten too high and created demand destruction or instead because supply chains have broken.

I don’t want to suggest that broken supply chains are a permanent condition though. Another theme along the sidelines of the event was that companies are reconsidering having locations in Russia, in China – and just overseas in general given the weaknesses exposed not only by the war but by the pandemic before it. Mexico seems like it might be the primary beneficiary of some of those supply lines relocating closer to home. Let’s hope that as trade flows are reshaped by this war – and whatever new world order might emerge from it – that supply lines are more durable.

And perhaps “just in time” isn’t the model we should be following. Maybe it should be “just in case”. I know some private service centers have been served well over the last few months by having inventory. Inventory might not be your friend in a falling market. But, as we’ve all learned, markets can change on a dime. And one thing that hasn’t changed: You can’t sell from an empty cupboard.

By Michael Cowden, Michael@SteelMarketUpdate.com