Even the most bullish analysts are downgrading steel-company shares, noting that oversupply has led to an eight-month decline in steel-product prices. Steel stocks are about 30 percent off their 2004 peaks. And the slump doesn’t appear to be over yet.
In this tough environment, many of the most vulnerable steel-related stocks are the middlemen, known as metal service centers
â€œUsually, what they try to do is get rid of inventories before prices fall. They didnâ€™t get a chance to do that.â€�
Service centers and their customers participated in a steel-buying frenzy last year, creating shortages and high prices. Now they have a surplus of steel they bought at high prices, which they are forced to sell on the spot market at declining prices. The price of hot-rolled steel coil, a common product, has fallen for eight consecutive months to about $500 a ton in June on the spot market, down from a peak of more than $750 a ton in September.
Yabut … surcharging allowed the same service centers to raise the output price of steel they had bought in a previous month where the surcharge was lower, so now with surcharges dropping, they have to sell inventory that they bought at a higher surcharge level. They got to bank that extra income … .
And it’s an interesting observation … service centers contributed to the buying frenzy last year … creating shortages and high prices. Of course, part of their job is to buffer the market from the pretty much steady-state steel production. So were they doing their job of buffering, or were they actually being hyper-reactive and contributing to the crisis?
How does one even assess this?