Last two years have been volatile for the steel market and the volatility is expected to continue in the near and long term. We explore how category managers can get ahead of future shifts and maximise value creation.
Steel is one of the world’s most widely utilised and frequently traded commodities, making it highly sensitive and responsive to economic shifts, supply chain challenges, and changes in global supply and demand – all factors that we’ve seen no shortage of over the last two years.
When global steel demand first started to pick back up after the first wave of the COVID-19 pandemic in Q3 2020, it triggered a huge surge in prices. Demand was high, but supply hadn’t ramped back up to match it – seeing prices in the US hit an all time high, and rise by 254% in a single year.
In the third instalment of our ongoing Commodity in Focus webinar series, The Smart Cube’s Sidharth Kalia, Kanica Goel and Anuj Madaan explored the story behind this unprecedented volatility, and looked at what the future holds for steel commodity managers.
The full webinar is available to view on demand here, but here are some of the highlights and key pieces of practical advice from their session.
The story behind recent steel commodity volatility is complex
Opening the session, Anuj gave an overview of the confluence of demand, supply, production, and macroeconomic challenges that have come together to drive the volatile conditions seen across the steel market over the past two years.
Only by looking at these drives and their impacts together can commodity managers unpick and start to understand the conditions that they’re tasked with navigating today:
Production cuts at steel mills across China suppressed global steel supply.
Reduced inventory at steel mills around the world has restricted availability.
Scrap steel availability reduced due to local lockdowns and halted operations.
Production cost increases
Coal and iron prices have risen significantly, driving the cost of producing steel upwards.
Upstream energy price increases have also driven operating and production costs up.
Recovery across industries following the initial wave of the pandemic triggered a huge surge in global steel demand.
Fiscal stimulus by governments around the world enabled more organisations to resume operations, and empowered them to buy and produce more.
Global economic recovery has driven demand for consumer goods and finished products.
Supply chain disruptions including port closures, container shortages, and the Suez canal crisis have restricted supply and driven logistics costs up.
Labour shortages have been intensified by the pandemic and brought disruption at every level of the supply chain.
The steel market has been volatile. But by reading the right signals, commodity managers can take a proactive approach to managing inflation.
Clearly, there are a lot of diverse factors and drivers that have come together to cause the volatility we’ve seen across the steel market in recent months and years. But, the good news is that by looking across those same areas and reading the right signals, commodity managers can still get ahead of upcoming shifts, and start proactively driving value.
During the webinar, Anuj showcased two extremely valuable indicators for steel commodity managers – the Business Confidence Index (BCI), and US Dollar Index Futures.
Steel prices and the US BCI show a 56.7% correlation, with BCI acting as a reliable five to six month lead indicator for steel prices. Both the price surge that began in September 2020, and the following fall in May 2021 were clearly forecasted 5 months earlier by extremely similar movements in the BCI.
Steel prices show a similar correlation with US Dollar Index Futures – at a shorter lag. Dips in the futures have been reflected in steel price increases of similar percentages, one to two months later.
Steel demand and supply are both set to increase – but prices will remain depressed in the short-term
One of the highlights of the session was an overview of the steel market outlook for 2022 and beyond, provided by Kanica. She provided a clear and detailed view of the conditions that category managers and their organisations can expect to face this year. Here are the headlines:
- Supply: Global steel production is forecasted to increase by 2.6% in 2022, largely driven by a reduction in the strict production cuts seen in China throughout 2021 and the scheduled capacity expansions in the US. However, production could temporarily be constrained in September, as emissions are cut around the 19th Asian Games.
- Demand: Global demand for steel is expected to increase by 2.8% in 2022, driven by increased economic stimulus around the world, and the continued easing of COVID restrictions.
- Price: Steel prices are set to continue on their current downward correction trajectory throughout 2022, as prices move back towards their initial pre-2020 levels. However, current projections suggest that prices will stabilise above those pre-COVID levels, in the $900-1050/s tonne range.
Short, medium, and long-term strategies for steel category success
Concluding the session, Kanica translated all of the insights shared into some extremely valuable short, medium, and long-term strategies that commodity managers can follow to help them create value and successfully navigate future shifts in the steel market.
In the short term, she suggested that category leaders focus on need-based buying at current price levels with the option to start building steel inventories if prices fall below $1015/s tonne. Category managers should also engage with local suppliers wherever possible, to help avoid any potential interruption from geopolitical events and other ongoing supply chain disruptions.
In the medium term, teams should avoid establishing long-term contracts at current price levels. Because prices are set to trend down this year, they should instead consider entering Q3 contract negotiations when prices are in the $940-$970/s tonne range.
In the long term, category managers should look to establish ongoing contracts in the $890-960/s tonne range. To achieve that, they’re advised to aggregate their requirements to make the most of volume-based discounts.
However, ongoing Russia–Ukraine conflict is expected to create higher demand for non-Russia origin steel, exerting upward pressure on European and US steel prices in the short-term. Russia is the 5th largest producer of steel globally, and accounts for around 4% of the global steel production.
Be ready for whatever tomorrow brings with The Smart Cube
You can’t ever completely predict the future. But with reliable category, commodity, and market intelligence from diverse sources, translated into clear actions delivered straight to your team, you can get ahead of key shifts and proactively optimise your procurement strategies.
To learn more about what our experts had to say about the year that lies ahead for the steel category – and to gain some expert advice for your procurement organisation in 2022, watch the full webinar on-demand now. And to find out more about The Smart Cube’s Commodity Intelligence solution, and see how we can help you master the global corn and palm oil markets – or any other major commodity market – today, click here.