Steel Recovery: Does it have legs?
It is now one year since the Great Crash in steel prices. We have all done our reflections and introspections. Question however remains if we have learned our lessons. The answer to us is NO. Yes the multiple Government stimulus packages have worked to save the economies; "Cash for clunker" have revived auto steel sales. But to us these are temporary measures to save the economies from total collapse and the Governments will soon run out of ammunition for repeated interventions. And it is only real demand not steroid driven demand that can revive steel consumption.
Unfortunately irrational exuberance is creeping back (did it ever go away). Steel mills are raising prices left, right and centre while service centers and end users are only cautiously restocking their inventories with staggered purchases. Capacities are also coming back online! Will the resulting overcapacity sustain the discipline the mills had in controlling supplies? Does the exuberance have legs or are we going to go through another price correction (to put it mildly) that will once again bring back the headaches of high priced inventories.
The wreckage of the price crash still remains and we are already prematurely celebrating. Are we kidding ourselves into another bubble? The worst may be over but any revival which is not gradual and sustained will result in yet another crash...the dreaded "W" shaped recovery!. Already HR prices are now under pressure in China. Is it a temporary blimp or will it infect the rest of the world? It is undeniable that global steel trade has fallen in last one year and recovery is very marginal and customers are relying on prudent purchases from domestic mills. So where will the capacities coming back online go? Will we see global price wars and discounting to move inventories which will inevitably build up.
There are just too many questions. While we are cautiously optimistic because the global economic recession seems to be have found the bottom, we also remain cautious and skeptical about the myopic exuberance. It seems misplaced and could once again come to haunt us. We admit our crystal ball is not clear. So it would be prudent to be cautious on the foggy road ahead of us and make sure the entire supply chain recovers in tandem.