Volatility of steel market begins with scrap, distributors say

Jan 26, 2010 | 12:24 PM | Corinna Petry

The relationship between spot and contract steel markets, the ownership of two of the largest scrap dealers in the United States by domestic steelmakers and the purchasing decisions made abroad are seen as crucial factors to understanding the short-term gyrations in steel pricing, according to a panel of Association of Steel Distributors (ASD) members.

"The pressure starts with inputs, as many of the contracts that go out (including ferrous scrap) are indexed in some way. Fundamentally, pricing is all tied to the spot market these days. It's kind of a chicken-and-egg thing. You no longer have stable pricing, to a large degree, at any level," said Joseph W. Darragh, vice president of sales at Charter Steel Trading Co. Inc., Chicago.

"When the spot market begins to move, the mills are inclined to drive the price as quickly and far as they can because it not only affects the spot market but it affects contracts. Customers have an equal and opposite reaction, driving it the other way. Rather than experiencing a consolidated industry that has smoothed the pricing cycle, we've seen an increase in volatility. I don't know that any of us knows how to deal with it except to operate on a short-term basis, with leaner inventories, more efficiently and be fiscally conservative," he said.....