When trying to assess trends in any set of numbers, there is a challenge in determining agency among direct causation, indirect causation and correlationthe latter of which may or may not represent evidence of the first two. This can be particularly difficult when assessing steel prices due to the many factors that drive them.
Conventionally, steel pricing is seen as a function of pure supply and demand: the more steel is needed in the market, the higher the price goes. But is it alwaysor even evertrue? And even if it is mostly true, which demand factors are directly pushing the price, which contributing factors are indirectly pushing it and which ones present themselves as correlations?
The most elemental and direct effect on steel pricing starts with the mill; nothing changes if steelmakers dont increase prices. What leads executives to make such a decision is where the complications arise. Direct factors that involve operational issues such as labor costs, energy rates, insurance, maintenance, etc. are certainly important, but it can be hard to measure universal trends among them because they tend to be proprietary.
Many other factors, however, are readily available and can offer some help in making these determinations. Speaking broadly, general economics play a role. Here are the annual percentage changes in steel prices stacked up alongside changes in gross domestic product (GDP) and the Dow Jones industrial average, as well as actual inflation rates: (Click here)
There is not a lot of correlation here. Steel prices move in conjunction with GDP about half the time but hardly ever move in sync with the Dow. This is not to say that general economic trends dont have an impact on steelmakers, but they may not be specific enough to be a reliable benchmark.
Next up are some factors more specific to the steel industry: comparisons with changes in automotive sales, the purchasing managers index (PMI) and construction trends: (Click here)
Steel prices track fairly well with the AMM Construction Index, but not so closely with the PMI. And while we know that vehicle sales have helped drive steel demand since the Great Recession, the magnitude of that movement does not correlate directly with the change in steel prices.
Moving in even closer brings us to factors within the metals sector itself. Here are steel prices compared with percentage changes in raw steel tonnage output, service center steel shipments and service center inventories: (Click here)
The correlation between prices and output tracks only about half the time, or no better than chance. Distributor inventories present a better correlation, moving with prices in seven of the 10 years.
So far then, construction and service center steel inventories provide reasonable correlations, though not strong enough ones. Maybe thats because the preceding factors havent factored in the global nature of steel. Next up: changes in steel prices vs. steel import prices and tonnages of ferrous scrap exports: (Click here)
Now were starting to get somewhere. The price of domestic steel and steel imports track closely every year. Clearly, they either drive each other in some way as buyers accept movement from one or the other first, or they are both responding to the same root factors. The amount of scrap exported from the United States tracks well against U.S. steel prices, so there appears to be some correlation there as well.
Finally, here is a comparison featuring raw material costs, as represented by annual changes in No. 1 heavy melting steel and Brazilian basic pig iron: (Click here)
There are very strong correlations in eight of the 10 years for both materials, and from 2008 on there is as clear a correlation as the steel import prices.
The conclusion? General economic factors may be important in driving business overall, but they have not proven nearly as solid as the cost of raw materials and the competition from imported steel in moving the needle on domestic steel prices. Furthermore, a bump in the construction market seemingly also would help boost prices.