Buying steel isn't easy. Suppliers quote flat-rolled steel in a number of ways, making it difficult for you, the buyer, to accurately compare prices and make the best possible decision for your business. That can result in less yield and, ultimately, lower profits. I often find that lowest quoted price is not the best value. I run into situations like this on a regular basis:

A material quote is sent to me reading:

10,000 #’s 26 gauge     60” x coil       g90 coating        cwt price_________

I quote the requirement at $62.95. My competitor quotes a price of $61.50

On the surface, it looks like the competition has me beat by $145.00 (2%). But while we're both quoting 26 gauge material, my material has a thickness of .0187 inch and the competitor's material is a thickness of .0197 inches. 

Gauge vs. Decimal
A "gauge" represents a range of thicknesses that fall within it, as set by ASTM (American Society for Testing and Materials). The parameters of the gauge are set by the "Max" and "Min," or the maximum and minimum thicknesses accepted. "Nom" is approximately in the middle. 

Many steel buyers purchase by the gauge, accepting any thickness that falls within it. Others buy on Nom because it's roughly in the middle and, well, the difference between the Min and Max can be tenths or hundredths of an inch. While that difference seems too slight to be significant, it becomes critically important when you factor in how much length these two coils will yield

January is in full swing, now passing the mid-month mark. New Year’s is a time to reflect on the previous year, break some bad habits and try something new. By now resolutions are in full force - holding strong or being tossed aside as unattainable goals. My resolution of not using the “Snooze” button has certainly been a challenge. 

Looking ahead to 2012, steel buyers continue to be faced with the volatility of the steel market. Knowing what material to purchase, when to buy, how much material to bring in under certain market conditions - all with the goal of putting your company in the best possible position to improve its bottom line, generate new business and expand market share - is no easy task. 

Fortunately, there are some buying practices you can adopt that will better position you and your company for success. Here are some “New Year’s resolutions” to keep in mind as we react to the roller coaster market in 2012:

1. Evaluate total cost of ownership vs. the price tag

• Hidden costs: Are all costs associated with the order included in your cwt or per piece price? Don’t leave the door open for hidden costs, i.e. transportation, surcharges or additional processing charges. Work with an account manager who will take the time to go over orders with this level of detail.
• Quality issues: Are you stuck scrapping a portion of a bundle or coil due to poor packaging or sub-par material? Do you have the recourse and/or relationship with your supplier to remedy these issues without incurring additional costs?
• End use: When comparing prices, consider the totality of your input costs and the percentage of steel costs that factor into your finished product. For example, an OEM manufacturing a product comprised of 20% steel doesn’t need to be as concerned about steel costs as a redistributor, whose bottom line is 100% tied to steel prices (aside from lesser costs associated with labor, storage and delivery).
• Yield: Purchasing steel is more than cost per hundredweight; it also translates to yield. Do you buy on gauge or on decimal? If decimal, do you buy on the Min, Nom or Max of the gauge your material requires? Calculating the percentage difference between the Min, Nom and Max will help you better compare costs and may result in greater linear yield - Anywhere from 5% to 25%!

2. Have an open “buyer’s mind”

• Buying options: Have you explored all buying options your supplier offers, i.e. spot market, hold and release, direct trade? Is a combination of buying options best for your business?
• Buying patterns: After analyzing your current buying patterns, can you think of any alternative scenarios? Have you come up with a way to track your customers’ usage and buying patterns in order to forecast future demand? Don’t be afraid to try new buying techniques, bring in new forecasting ideas, or develop a different way to measure inventory volume and turns.

3. Analyze both market fundamentals and market psychology

• Follow the market: Know the input costs of steel product, i.e. scrap, iron ore, zinc and coking coal.  Following these markets will help predict where steel pricing could be heading. These fundamentals, along with economic indices, will paint a portion of the story. (For a free weekly summary of these market fundamentals, sign up for the (C)ORE Report.)
• Pay attention: Take a look at buyers’ confidence in the market - What do you hear from your suppliers? Are they firm on pricing or looking for orders? Do you see availability out there with a competitive landscape?
• Form an opinion: Keeping all this in mind, form a balanced opinion. Analyze your own thoughts and then compare it to the front-line negotiators.  

4. Be self-reflective

• Start a conversation in your organization: Don’t forget to tap into the resources right in front of you. Take a look at your own business, talk internally to sales, see what they are hearing from their customers. Where do they expect demand to go? What challenges are they facing when trying to secure business? This will ultimately impact your inventory and purchasing strategies.
• Maintain a dialogue: Keep the lines of communication open to broaden your understanding of the market and your company’s strategic position within it. Majestic Steel has benefited from bringing together our purchasing and sales teams. In our weekly “Einstein meetings,” we can share our unique perspectives and together, form a collective outlook on the market.

The steel market is evolving rapidly, becoming more and more volatile each year, and we must evolve with it. Former practices may no longer be relevant; we need new tools and strategies that will keep pace with an ever-changing landscape. Resolve to do business a little differently this year and see how it goes. Here’s to New Year’s resolutions and a successful 2012!

The Dow Jones average has seen some strength as we enter the first few weeks of January; steel stocks have as well.  This is a welcomed sight for sore eyes as both the Dow and steel stocks, for the most part, underperformed in 2011.

The Dow finished the year at 12,217 - thanks to a late-year surge showing a gain of about 4.5% for the year.  On the other hand, the S&P Supercomposite Steel Index ended the year at 150.74, down 21% from 190.88 to start the year.  

The reason for the decline in the S&P Steel Index was a sharp declines in both steelmakers and raw materials.  U.S. Steel (X) slid 54.7% for the year, which was the highest of any domestic blast furnace steelmaker.  AK Steel (AKS) slid 49.5%, ArcelorMittal (MT) slid 49.6%, ThyssenKrupp (TKA) slid 42.8%, and Severstal (CHMF) slid 32.4%.  Nucor (NUE) showed the least decline of the major steelmakers by “only” sliding 9.7% in 2011.

While the domestic producers’ stocks had a rough year, metal service centers and raw material producers didn’t fare much better. 

With most of the stocks experiencing a rough 2011, most are off to a strong start this year, thanks in part to the recent price increases seen across the industry.  Here is hoping the stocks have a stronger 2012.

Despite the fact that the U.S. dollar has strengthened recently against the euro, mainly due to the severe issues in Europe, it remains weak compared to Asian currency like the Japanese yen and the Chinese yuan.  The weaker dollar has helped to increase exports since the weakening dollar means more competitive export prices, benefiting trade partners in the form of lower prices. 

The weaker dollar has also helped to quell off the influx of imports seen over the last ten years since exchange rates have been in favor of foreign manufacturers. This results in increased import prices, encouraging domestic shoppers to buy American-made products.

As a result of the weaker dollar and the increase in import prices, many foreign companies, especially in Asia, are starting to move manufacturing facilities to the U.S.  Just in the last year, Japan has moved a handful of auto manufacturing facilities to U.S. soil to help combat the exchange rate problem.

China is expected to follow suit as the yuan continues to appreciate against the dollar, driving Chinese labor and material prices higher. In order to combat this rise in costs, many Chinese manufacturers are expected to move their operations to the U.S. where, ironically, labor and materials prices are cheaper. The expected movement of these manufacturing facilities to the U.S. could mean more jobs in the manufacturing sector, boosting the tired economy.

Although some evidence of these expected moves have been surfacing over the past few months, only time will tell if enough manufacturing facilities will move to the U.S. to make a significant impact on the manufacturing sector. With the amount of high-tech jobs the U.S. is losing to foreign countries (in part because of the lack of interest in these fields) it’s possible the effects will be minimal at best.

Here is what I am watching this week:

1. Industrial production data for December is released on Wednesday. After sliding slightly in November, production will look to jump higher at the end of the year.
2. Also out this week is inflation data, both for producers and consumers.  While the PPI climbed marginally in November, the CPI continued to decline, down for the second consecutive month-over-month reading.
3. As I mentioned,  we start to see construction data this week, clearing up the picture of 2011.  Thursday brings us the housing starts data while Friday has the existing housing sales numbers.  Both numbers will be important in determining if there were any signs of life in the downtrodden sector.
4. Manufacturing has been one of the strongest sectors of the second half of the year; this week we get two key indicators hopefully showing that this trend is continuing.  The Empire State MFG Survey and the Philadelphia Fed Survey will be important to follow.

As always stay close to the (C)ORE Blog to keep up with everything that is happening involving the steel industry.

If Friday the 13th is traditionally considered the unluckiest day of the year, I thought I would take this unlucky day to talk about a part of the economy that might actually be lucky, and by lucky I mean starting to show some strength.  

Weekly initial jobless claims are measured on a seasonal basis of total number of claims for unemployment benefits in a given week.  This indicator is important to follow as it gives you a good reading of the current job market.  What is the first thing most people due after getting fired? - That’s right, head straight to the nearest unemployment office and file for unemployment.

Weekly initial jobless claims have started to improve as of late; the four-week average came in at 381,000 claims last week.  This was down from 427,000 claims the first week of July and 418,000 claims the same week a year prior.  

The benchmark for jobless claims tend to be the 400,000; claims totaling any number below 400,000 is looked at as a good sign and necessary to keep up with population growth.

So as we enter the most unlucky day of the year (and for some of you, Mother Nature sure played her part today), we should take a second to look at a part of the economy that may be starting to recover - and good thing, as it is way overdue.

Have a safe week and stay away from this guy…

On September 20, 2011, China announced the launch of its own iron ore price index, made available on a weekly basis starting in October 2011. The index is said to be an attempt at influencing international prices of iron ore, as China is a major exporter of iron and steel products.

The China Iron and Steel Association (CISA) established the China Iron Ore Prices Index in coordination with the China Chamber of Commerce of Metals, Minerals and Chemicals Importers and Exporters and the Metallurgical Miners’ Association of China (MMAC).

One expressed goal for the index was to “break the international monopoly giants” - namely, S & P's index (Platts), Metal Bulletin Iron Ore Index (Metal Bulletin Iron Ore Index) and the Steel Index (TSI). According to one source, China Steel Association Secretary-General Zhang Changfu wished to “objectively reflect the iron ore market conditions, rather than compete for iron ore pricing right to speak.” In addition, the weekly price index would allow steel companies to use fluctuating market prices to their advantage much more easily than a monthly price index would. 

China’s steel output accounted for 44.3% of the world’s total in 2010, so an index such as this would have the potential to become a game changer in the iron ore market. Like all things Chinese, the index will be heavily government regulated and in more times than not favor the Chinese. (One article published shortly after the launch argued that because CISA represents the interests of Chinese steel producers, it cannot be a neutral third party information provider.) With that being said, the index still might provide a valuable look into the Chinese markets.

However, we at Majestic Steel Research haven’t been able to find this CISA index anywhere. The strongly promoted “launch” of the index has received little follow-up press, and despite reports that CISA began its trial-run tracking of the index in August, no records of iron ore pricing can be found on CISA’s website, other than a short news briefing on the index launch.

While we're not sure of the reasons behind this elusive index, we'll continue to keep an eye out for it. In the meantime, you can look to Platts, Metal Bulletin and The Steel Index for spot iron ore indexes. Receive a free weekly summary of these indexes and other key indicators driving steel prices by subscribing to the (C)ORE Report.

In case the index is later published, it is composed of two sub-indices: domestically-produced iron ore price index and the iron ore import index. The domestic price index is based upon the prices of iron ore concentrates in 14 provinces in China, including 32 mining areas. The import price index uses pricing data from eight Chinese ports.

After a slow but strong start to the New Year last week, things look to continue their positive momentum this week.  While this week is relatively quiet as well, there are still important releases to keep an eye on.

Here is what I am watching this week:

1. On Tuesday, we get the Small Business Optimism Index from NFIB.  While consumer confidence is important, the confidence of the small businesses of America is also important, as small businesses are usually the first to feel the effects of a slow down and the last to see any upward movement on the way out.
2. As usual, the initial jobless claims report out on Thursday will be looking to build on the momentum started with last week’s employment report.  As claims have now been under the key benchmark of 400,000 for the better part of six weeks, continued declines are still necessary.
3. Also out on Thursday is the Retail Sales report for December.  This is usually a key indicator as December retail sales are seasonally strong due to the Christmas holiday; a strong reading could go a long way to boost confidence.
4. Rounding out this quiet week is the initial reading of consumer sentiment from the University of Michigan/Reuters survey.  Consumer sentiment has now climbed for four consecutive months and should continue this momentum with this initial release.

As always stay close to the (C)ORE Blog to keep up with everything that is happening involving the steel industry.