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January 1, 2007

Why Perspective Matters

We at the Metals Service Center Institute continuously strive to find ways to help our members run their businesses more profitably. Our job at MSCI and Forward magazine is to find and present the best information and insights we can for your consideration. Of course, we hope and believe that the thought leadership we provide is timely, relevant and of significant value.

That’s why we think it’s time for the industry to reconsider conventional wisdom about metals inventories and, in particular, steel inventories.

Conventional analysis saw the record-high steel inventory levels at metals service centers in late 2006 and reacted negatively, narrowly and predictably. Yes, the large steel stocks at the peak of the inventory cycle are an important market factor. But observing inventory totals in isolation from long-term inventory trends provides a skewed result. All of us can use a little perspective.

For example, almost unnoticed, for the last 30 years, the average annual growth rate of steel shipments from service centers has been 2.8%. No wonder, then, that successive, cyclical inventory peaks also are growing. The total steel stockpile is large, without question, but the base of underlying activity is larger, too. Proportionately speaking, the late-2006 inventory peak is not astonishing.

This leads to a second largely unnoticed trend. While steel shipments from service centers rise about 2.8% a year, industry steel inventories are only 2.1% higher on average. Industry inventory management is good and has continued to improve, and that’s almost never mentioned in conventional inventory analysis.


INDUSTRY INVENTORY MANAGEMENT IS GOOD AND HAS CONTINUED TO IMPROVE, AND THAT’S ALMOST NEVER MENTIONED IN CONVENTIONAL INVENTORY ANALYSIS.


Our Metals Activity Report and the long-term statistical series of monthly service center shipments and inventories confirm both trends. Those record-high late-2006 inventories that analysts found so alarming represented, at then-current shipping rates, a 3.8-month supply of steel. No question, that’s a lot of steel, but again, steel shipments typically wane every November and December. So increases in months-on-hand at the end of a year are not as significant as similar increases in the spring or summer.

My point is this: The tools exist to tell you a great deal about what’s really happening in the metals world. Our Metals Activity Report, viewed from one perspective, provides data—a plethora of facts—that present a snapshot of the marketplace.

How you use that data, though, is entirely up to you. Use it to generate alarming statistics—Benjamin Disraeli’s angst-ridden third level of prevarication—or consider the numbers coolly and calmly, with perspective and understanding.

As we enter a new year, we wish you the best of both perspectives: an abundance of useful statistics balanced by an equal abundance of Helen Keller-style vision.

Happy New Year!