HupSteel

Hupsteel benefits from rising steel prices if the steel products are sold at spot price (rising and therefore likely higher) than its inventory costs which are carried on the books using weighted average cost (accounting policy). A lot has to do with the cost of inventory that Hupsteel paid for.

I am using LME website to look at steel price.

http://www.lme.com/metals/steel-billet/#tab2

Can also check out the prices of other metals in the website.

(09-10-2013, 10:22 PM)FatBoi Wrote: Hupsteel benefits from rising steel prices if the steel products are sold at spot price (rising and therefore likely higher) than its inventory costs which are carried on the books using weighted average cost (accounting policy). A lot has to do with the cost of inventory that Hupsteel paid for.

Hi, thanks for replying. I can see that the current inventory can be sold at higher prices due to higher spot prices, however wouldn't the actual costs of replacing this inventory to continue trading be higher too? I am wondering if producers were a better pick as, if the nature of the steel price recovery is supply side, the spread between steel and iron ore and coke prices might widen benefiting producers in a more direct manner.

Hi Clement, my understanding is many steel producers are operating at very poor margins (near zero margins) and some in the red. That is probably due to a couple of characteristics. They have high capital expenditures, highly leveraged and they find it hard not to be operating at optimal capacity. So even if steel prices are low, they can't shut down and wait for price to rise.

For steel stockists, they are usually quite nimble and capitalise on their ability to optimise inventory mgmt and working capital mgmt.

I can't really put a finger to which category will be benefit more from the steel price rise (any fellow VB can shed light on?) but I agree with the points you made on inventory replacement cost. it is a risk for non steel producers.

(10-10-2013, 12:24 AM)FatBoi Wrote: Hi Clement, my understanding is many steel producers are operating at very poor margins (near zero margins) and some in the red. That is probably due to a couple of characteristics. They have high capital expenditures, highly leveraged and they find it hard not to be operating at optimal capacity. So even if steel prices are low, they can't shut down and wait for price to rise.

For steel stockists, they are usually quite nimble and capitalise on their ability to optimise inventory mgmt and working capital mgmt.

I can't really put a finger to which category will be benefit more from the steel price rise (any fellow VB can shed light on?) but I agree with the points you made on inventory replacement cost. it is a risk for non steel producers.

I think those characteristics of producers are strengths in a rising market. High capex leads to high fixed cost, low variable cost and high operating leverage. This positions them ideally to benefit from increases in sales price and volume. I've been eyeing arcelormittal for quite some time but hesitated due to a foolish attempt to time the market. (Shouldn't have, missed the low)

(09-10-2013, 08:27 PM)nitro Wrote: Hi, which page of Edge Sep 16 - 22 issue, can the article be found?

do not remember seeing any article relating to steel prices, except one big section of several pages of Iskandar properties

Refer to page 8 - interview with Stephen Green.

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(09-10-2013, 11:47 PM)Clement Wrote:

(09-10-2013, 10:22 PM)FatBoi Wrote: Hupsteel benefits from rising steel prices if the steel products are sold at spot price (rising and therefore likely higher) than its inventory costs which are carried on the books using weighted average cost (accounting policy). A lot has to do with the cost of inventory that Hupsteel paid for.

Hi, thanks for replying. I can see that the current inventory can be sold at higher prices due to higher spot prices, however wouldn't the actual costs of replacing this inventory to continue trading be higher too? I am wondering if producers were a better pick as, if the nature of the steel price recovery is supply side, the spread between steel and iron ore and coke prices might widen benefiting producers in a more direct manner.

As long as the demand for steel is raising, it will benefit both the steel mills and steel stockist, as they are able to pass the higher cost to their customers. Steel mills have high overheads, and faced the risk of not able to absorb their overheads costs if they cannot produce at optimal capacity. On the other hand, steel stockists faced holding inventory risk. Inventory management is critical. Asia Ent has a rude shock when they need to write down $24 million of inventory in Q4 2008, when the price of steel took a sudden downturn. This erased most of their profit made in that year.

(10-10-2013, 09:44 AM)Ben Wrote:

(09-10-2013, 08:27 PM)nitro Wrote: Hi, which page of Edge Sep 16 - 22 issue, can the article be found?

do not remember seeing any article relating to steel prices, except one big section of several pages of Iskandar properties

Refer to page 8 - interview with Stephen Green.

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(09-10-2013, 11:47 PM)Clement Wrote:

(09-10-2013, 10:22 PM)FatBoi Wrote: Hupsteel benefits from rising steel prices if the steel products are sold at spot price (rising and therefore likely higher) than its inventory costs which are carried on the books using weighted average cost (accounting policy). A lot has to do with the cost of inventory that Hupsteel paid for.

Hi, thanks for replying. I can see that the current inventory can be sold at higher prices due to higher spot prices, however wouldn't the actual costs of replacing this inventory to continue trading be higher too? I am wondering if producers were a better pick as, if the nature of the steel price recovery is supply side, the spread between steel and iron ore and coke prices might widen benefiting producers in a more direct manner.

As long as the demand for steel is raising, it will benefit both the steel mills and steel stockist, as they are able to pass the higher cost to their customers. Steel mills have high overheads, and faced the risk of not able to absorb their overheads costs if they cannot produce at optimal capacity. On the other hand, steel stockists faced holding inventory risk. Inventory management is critical. Asia Ent has a rude shock when they need to write down $24 million of inventory in Q4 2008, when the price of steel took a sudden downturn. This erased most of their profit made in that year.

Hi Ben, to me the key issue is cash flow. A higher selling price does not automatically result in higher free cash flow as the proceeds need to be reinvested into products which have also risen in price. A steel producer benefits directly as the cost of replacing inventory does not rise with sales prices.

So its the end users who bare the blunt of the price increase? Companies like ship builders, constructions who already sign the contract, but yet to deliver the goods?

Spot sales maybe yes, but project sales should be price locked in, so steel providers will bear the risk of higher inventory replacement cost.

For projects, will stockists use forward contract pricing to secure a price for steel that will be profitable?