What Explains High Steel Prices?

If you subscribe to Purchasing, you more than likely receive pricing alerts, suggesting that steel or another commodity is up a certain percentage. However, the magazine rarely states the real causes of such price increases, leaving inquiring minds hunting for more details. Fortunately, Metal Miner, a Spend Matters affiliate blog which cranks out the same amount of content per day as Spend Matters (albeit on the metals sourcing world, specifically), has the answers. In the above-linked post, my lovely wife and blogging partner-in-crime opines that the explanations in the headlines don't cover the real reason steel prices are up.

To sum up Lisa's analysis, steel companies are blaming "high prices are due to demand and spiking raw materials" for price increases. In contrast, raw material producers claim that price increases are due to "demand and constraints on steel-making capacity (and NOT raw material costs)." So what gives? According to Lisa, "The truth, as in life lies somewhere in the middle. Suffice it to say that raw materials likely make up over $500 per ton of steel produced ... But we believe steel makers have a close eye on capacity and have idled plenty of lines to keep steel prices high." So there you have it. One wonders if there has been any collusion between the steel makers when it comes to idling capacity. Just speculation, of course, but in an industry which is consolidating down to fewer and fewer players, I can't help but wonder what types of back channel sign language is going on, given that the real reason for actual pricing levels can't be traced back to what big steel is claiming alone.

Supporting this argument is the fact that steel companies strongly oppose Nymex traded futures contracts, as Lisa suggests. This indeed might show why big steel is so worried about losing pricing control. For procurement organizations, however, the good news is when pricing ends up in the hands of traders and the market rather than the whims of steel executives, a market price will ultimately triumph. But more on that on the pages of Metal Miner later (and if you're not already reading it daily, you should be).

- Jason Busch

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