In April, Nucor took a major step in changing the landscape of steel pricing in the United States. The country’s largest steelmaker announced plans it would begin offering a weekly spot price to its customers.
One of the hoped-for goals of the Nucor Consumer Spot Price from the Charlotte, N.C.-based steelmaker was to reduce risk in the steel market. Three months in, how is that going? Is this historic pricing visibility removing some of the famed volatility that has defined the market for going on two decades?
Spencer Johnson, who works on the LME trade desk for financial services company StoneX, thinks “probably not.” Johnson was a recent webinar guest of Steel Market Update.
Johnson prefaced his remarks on Nucor by observing that the steelmaker’s new CSP was undeniably a positive for the market.
“I think the index publication is useful for the market. The more data you have about what’s happening in the spot market [is a good thing],” he told SMU boss Michael Cowden. “When it came out they were more willing to let that number get closer to reality than mills had previously done. That was a bit revolutionary.”
But whether this visibility is able to put a bit of a damper on volatility is another matter entirely, one Johnson just doesn’t see happening. “The things that are driving the underlying price volatility are not really going away because Nucor is telling us they’re having a settlement price they’re going to come out with every Monday,” he said.
For starters, volatility in the market often comes from matters outside the mills’ control. Geopolitical events, such as the Russian invasion of Ukraine, trigger changes in pricing that no amount of weekly price visibility can counter. The regular flow of trade decisions are also another factor contributing to pricing swings.
Moreover, there’s the simple issue of inputs. Costs for raw materials will also move somewhat independently of HRC pricing, which is ultimately factored back into the steel price. “Iron ore costs, scrap costs – if those things are volatile, so too will the downstream product created from them be volatile,” he said.
In fact, in some ways, the ups and downs of steel pricing are somewhat inevitable, he says, pointing to an incident earlier in the decade that kind of locks that condition in place.
“Steel price volatility is something we’ve seen ramping up every year since China decided they didn’t want to do annual iron ore contracts. Basically, since the Great Recession. It became clear there was never going to be any annual contract terms for inputs for steel producers,” he recalled.
“That meant the volatility on the underling inputs has to get priced in day to day, as opposed to historically when they would fluctuate more moderately from year to year,” he said. “It’s hard to put the genie back in the bottle on long-term contracts.”
As one who works on the LME desk, Johnson’s bent to managing the volatility is through the use of the futures curve. But, just as with Nucor’s spot price, those strategies shouldn’t be considered a solution, or contributor, to volatility.
The futures market doesn’t make the price more volatile; “it’s a reflection of the underlying volatility in the base price itself,” he said. “If the base price goes from $600 to $2,000 and back to $600, the reverberation of that spot market volatility is felt in the forward prices. As the underlying market is going crazy, the futures traders are trying to make sense of it in the same way the service centers and traders are on the physical side of things, trying to make sure you don’t get run over and have too much risk in one place.”
The futures market, he added, is also not a terribly good predictor of future prices, which is also not a concern, as “the inevitable wrongness” of pricing predictions across the industry are what makes them attractive to clients.
“You use futures because you cannot predict the future,” Cowden summarized.