Steel and the Price at the Pump

By Jim Stavis

     Everyone has noticed and been
alarmed at the high cost of filling up
their gas tanks. It seems that retailers
are raising prices on a daily basis
with no end in sight. And as
consumers, what choice do we have?
Rapid transit?
     The pricing policy for gasoline
appears to be rather arbitrary and
many believe to be collusion
amongst the oil companies. But
what is at work is the same
dynamics that is now occurring in
the steel industry.
     With any commodity there are
accepted prices. We get used to
paying a certain price for a certain
amount of… whatever. When that
price rises too quickly we believe
that some shenanigans must be
taking place. The first effect you see
is a rippling of price increases
throughout the area. Different gas
stations will adjust to the increase at
different times. Nobody wants to
gratuitously raise their prices,
because that will send consumers
elsewhere. Gasoline is, after all, a commodity and retailers understand they must be competitive. Everyone who raises the price of gasoline has a good reason for doing so.
     When a station buys a tanker of
gas, they all pay about the same
price for every gallon of it. Once
they have bought it, the cost is
immaterial. That price is history.
The price they want to charge for
that gasoline is the cost of the next
tanker of gasoline. That's why
prices rise so quickly, even before
the next tanker arrives. If a gas
station sells most of its gas at a
lower price, it will have to dig deep
to pay for the new tanker at the
higher price.
     Prices rise on bad news. If a
station anticipates that the prices
will rise in the future, then they
will raise the current price. The
worse the news, the higher the
increase. Even rumors of bad news
will cause the prices to increase.
Price setting is always a gamble, a
risk, a guess. You have to buy in
the past and sell in the future.

     Anything can happen in the
meantime. When there is a war in
Iraq, when refineries are having
trouble, when Venezuelans are
upset over their banking policy,
when pipelines burst, the cost will
rise. None of this speaks to the
demand portion of the equation.
There are times of the year when
gas volume must be increased
because more people are driving
(i.e. vacation months). This too
will generate a rise in prices. The
question is: what makes prices go
down? Prices fall more slowly than
when they rise. The fall in prices is
a discovery process: how much will
a retailer lower his prices and yet
maintain volume? Lower them too
far too fast and it will cause a price
war and lower profits.
     To many, steel is another
commodity that has similar market
dynamics at work. The raw
material that the steel is produced
from is not infinite in supply. The
scrap and iron ore has risen in
value, therefore causing the steel to
be more costly to produce.
     Demand in others parts of the
world (can you say China) has
sucked a significant amount of
tonnage away from the United
States. Many steel mills have also
disappeared from the scene due to bankruptcies and a weakened
economy. This has created
uncertainty in the marketplace that
is fueling the price increases. The
fear that prices will rise going
forward and that supply will be
short is what has caused the current
increases. Prices will not recede until
the uncertainty passes or demand
decreases (whichever comes first).
     For now, all we can do is try and
understand or make some sense out
of what is happening. Let's hope
that we don't get to the point with
steel as we did with gas, when we
said “I remember when gas was only
19 cents a gallon.”

The China Syndrome

By Jim Stavis

     Once again trade is a hot topic
these days and now China and the
effect it is having on the world
trade balance is at the forefront.
During the last months of 2003,
there was a flurry of legislative
action introduced in Congress to
add tariffs on Chinese imports.
What is driving the effort is the
valuation of the Chinese currency
in relation to the U.S. dollar. As
the dollar has weakened in value,
the Chinese Yuan has increased.
China has been reluctant to put
currency revaluation on its agenda
in spite of the meetings they have
had with U.S. representatives.
Revaluing the Yuan would expose
a weak banking structure, massive
unemployment and potentially
disrupt China’s most important
economic engine—exports.
China has plans to increase its
imports of U.S. products, including
billions of dollars in telecommunications, aviation and
chemical equipment. But these
numbers pale in comparison to
the amount of goods and services
flowing out of China. The U.S.
trade deficit with China increased
to $103.2 billion for the first 10
months of 2003. At year end,
that number should top $130
billion.

Steel and steel products
increased year to year by 23.3%.
     China’s voracious appetite has
created shortages in raw materials
such as ferrous and non-ferrous
scrap, coke, ocean shipping
capacity and even electricity.
      This is causing major repercussions around the globe as countries try to keep us with the changing trade dynamics.
      Experts believe that China will soon end there decade old fixed exchange rate. Many believe it will happen by the end of 2004. Inflation from its booming economy and the fast pace of money and credit growth are major concerns. One economist predicted the change to occur by late October 2004—
just in time for the U.S. election.
Stay tuned.