What is market volatility?

Steel Price Market Volatility Chart

Generally speaking, market volatility refers to the increase or decrease in the price or value of goods and services over a specific period of time. 

Volatility is measured by measuring the magnitude of changes in a market relative to the overall average of the industry. 

Changes that cause volatility are usually sudden and unpredictable, triggered by major events such as epidemics, wars, recessions, inflation, and policies.

What are the causes of market volatility in the steel industry?

For steel, volatility can stem from a variety of factors, including:

1. Global economic conditions:

Economic recessions or booms in major economies such as the United States, China, and the European Union can have a significant impact on steel demand and prices. 

For example, a recession can lead to a drop in demand and lower prices, while economic growth can push up demand and prices.

2. Supply chain disruptions

Events such as natural disasters, geopolitical tensions, and logistics challenges can disrupt supply chains, leading to shortages and price increases. 

The COVID-19 pandemic is a recent example of a severe shock to the global supply chain, causing steel prices to soar.

3. Trade policy and tariffs:

Tariffs and trade restrictions imposed by governments can affect steel prices by changing import and export dynamics. 

Tariffs on steel imports, such as the US tariffs on steel under Section 232, can lead to higher domestic prices.

4. Raw material costs

The prices of raw materials such as iron ore and coking coal directly affect the cost of steel production, and price fluctuations in these commodities can lead to corresponding changes in steel prices.

5. Energy prices

Steel production is an energy-intensive industry. Fluctuations in energy prices, especially electricity and natural gas, affect the cost of steel production and, in turn, steel prices.

How market fluctuations affect steel prices

Steel prices are highly sensitive to market fluctuations. When demand exceeds supply, prices tend to rise, and vice versa. 

However, the magnitude and duration of price fluctuations can vary depending on the underlying cause. For example:

Short-term fluctuations: Temporary disruptions such as strikes or minor geopolitical tensions can cause short-term price spikes. 

Companies may face sudden increases in steel costs, but expect prices to stabilize relatively quickly.

Long-term volatility: Structural changes in the market, such as major economic policy shifts or prolonged geopolitical conflicts, can lead to sustained price volatility. 

These long-term changes require companies to take a more strategic approach to managing costs.

What this means for order volumes

Steel coils are ready to order

When purchasing demand declines, steel mills and suppliers often become concerned, leading to a slowdown in production. 

Given this inherent characteristic, companies must adopt flexible and proactive strategies to manage order volumes. 

Here are some effective methods:

Just-in-time (JIT) inventory management: This strategy orders steel only when production requires it to minimize inventory costs. 

While JIT can reduce inventory costs, it requires a highly reliable supply chain to avoid production delays.

Bulk purchasing: When prices are low, purchasing steel in bulk can lock in favorable prices and avoid the risk of future price increases. 

However, this approach requires a lot of capital and storage capacity.

Long-term contracts: Signing long-term contracts with suppliers can ensure stable and predictable prices. 

These contracts often contain clauses that take into account market fluctuations, providing a balanced approach to cost management.

Rather than being stuck with excess product, it is safer for suppliers and steel buyers to place fewer large orders.

More resources on metal sourcing

Market volatility presents both challenges and opportunities for businesses that rely on steel. 

By understanding the factors that drive price fluctuations and taking a strategic approach to managing order volumes, companies can more effectively navigate a complex market. 

Staying up to date on the latest trends and developments in the metals industry is essential to making smart purchasing decisions.