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Should mill transparency be afforded a veil of secrecy?

Keywords: Tags  Full of Scrap, ferrous scrap, steel mills, Lisa Gordon

Publicly owned steel companies with scrap assets are dealt a double-edged sword when it comes to quarterly earnings calls with analysts. The inability of mills to keep proprietary market intelligence on the scrap industry can be disruptive to both the steelmaker and its recycler.

The information creates a dilemma for trade journalists, who are well aware that their coverage has the potential to expedite or cancel finished steel orders for mills while simultaneously impacting scrap suppliers’ pocketbooks. Turning a blind eye to the information would be irresponsible journalism, of course, but reporting the news can weigh heavily on one’s soul.

Trade journalists aren’t allowed to ask questions during conference calls, but they tune in to the conversations to report trends and developments of interest. After the financial results are sifted through, at least one analyst will inevitably ask about the direction of scrap prices.

Scrap is the largest bellwether for near-term finished steel prices, so information on the direction of scrap prices can provide analysts with another tool to assess a company--but it can wreak havoc on a steelmaker’s order books and impair its ability to capture price increases.

No matter what the response, it can be a lose-lose situation for steelmakers and scrap suppliers. The backlash of the answer varies, but it always seems to be at the steelmaker’s and scrap supplier’s expense. It is like playing blackjack where the dealer has to show his cards first.

During an October 2013 earnings call, when scrap prices seemed poised to take an upward leap, executives at one steelmaker confirmed that there was no scrap price retreat in the near term. The confirmation that scrap had hit bottom and would be heading up--two weeks after the call, shredded scrap rose by $25 per ton and No. 1 busheling by $23 per ton in the Chicago market--motivated finished steel buyers to lock in orders before the imminent price increase became official. The new orders, based on the information from conference calls, were placed at October price levels, which meant that mills lost the opportunity to capture $20-per-ton price increases on finished steel. Mills have found a way to dance around this phenomenon, conveniently closing order books for the month when its senses a price increase, according to finished steel buyers. When a mill doesn’t close its order books and an increase is announced, it can give a specific expiration date that orders are price protected.

The announcement of better days ahead can also become a headache for the scrap supply chain. When suppliers such as auto wreckers hear that a price increase is pending, they take to the sidelines and withhold inventory until the new prices settle. Sometimes, the wreckers are still willing to sell but insists on the anticipated new price, so scrap recyclers who are already working on skinny margins lose the chance to build up feedstock before the increase takes place. Scrap is a commodity, and the candid information takes much of the gambling out of the game.

It is at times like these when diligent reporters, who are trying to disseminate timely information, are chastised for disrupting the market and hurting the ability of industry players to purchase scrap at the market’s current numbers. Four earnings call seasons each year equates to the potential of this occurring one-third of the time.

A reverse situation occurred in January, when it was evident at midmonth that a hard correction was in the cards for February. January was an up month for scrap prices, with mills announcing price increases, but one mill indicated during an earnings call that scrap prices were going to remain under pressure for the first quarter. With the cat out of the bag, finished steel buyers immediately canceled orders and retreated to the sidelines. A few days later, one mill rescinded its price increases on concrete reinforcing bar and steel beams. The cancellation of a price increase seemed destined for February, but the speed of information expedited the decision.

The pending doom and gloom on the horizon began to work into the scrap arena as well. Nervous players started unloading inventory at prices that were down $25 per ton before February buying got under way. Such panic sales can actually push the scrap market lower than it normally would have gone.

The earnings calls can be a mecca of information in an informal and unscripted setting: Details on new initiatives are discussed at length and reporters are offered macroeconomic takes on industries that consume steel, but it seems there is a place where the information should stop. It seems against the principles of capitalism that mills have to disclose too much, too soon.

It might seem ironic that a reporter who believes in freedom of the press is suggesting that mills say less about specific areas that can directly impact their order books, but such a move would have no impact on the quality of reporting. Trade reporters can still provide an accurate assessment of the market, and perhaps that is a better way to approach price movements. Hearing it straight from the horse’s mouth can be costly to the horse.

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