The Inflation story no one is talking about: STEEL!

Good morning everyone!

There are a few things I want to get to this morning, but I wanted to start out with the inflationary pressures in steel that I have able to confirm by a couple sources from the steel industry.

I bring this up because steel is a very important commodity in the economy because, like oil, its a key raw material cost in many areas of our economy. Its a major cost in things like cars, building materials, hand tools, steel wire racks in your closets, farm equipment. You name it. Many say its one of those staples that you need to keep your eye on in order to gauge how the economy is going.

One source confirmed that steel prices on certain steel products have almost TRIPLED in about 6 months. Prices have risen from about .26 a pound up to 68 cents a pound in the past 6 months. I have also confirmed that there is another price increase that's been announced for July by the major mills.

This is on mainly round bar materials, but I have been told its pretty much being seen industry wide. The reason for this is because scrap, which is used in all steel products, has been the main force pushing prices up.

So why are prices soaring higher?

Like oil, scrap is being gobbled up by China and other emerging markets. Its a supply and demand issue. This has forced mills to add a "scrap surcharge" to all orders which can be as high as the cost of the steel itself.

The second reason for the price increases is pricing power. The steel mills simply cannot keep up with world demand so they are able to raise prices. Demand at US mills is so strong that they are rationing their customers in terms of how much steel they are allowed to buy each month.

This has left everyone scrambling to find steel. Exporters are calling anyone and everyone trying to find product because their international customers have unlimited demand.

The Fallout from Rising Prices

Inflation anyone? Imagine being an end user and your key material cost has tripled. Many end users will eat smaller increases because they will not want to risk losing the customer. When costs triple, they can no longer afford to "eat it" and must pass it on no matter how big the customer. From what I have learned, even Walmart and automotive are accepting these price increases.

One "end user" source confirmed to me that after dramatically raising his prices to Walmart, they then stopped buying for eight weeks playing hardball. The"end user" explained to me that he was ready to then walk away because he couldn't afford to manufacture at a loss.

Of course after shopping around, Walmart realized everyone was at the same new price. After this realization, they ended up accepting the whole price increase, and resumed buying including the 8 week inventory that they walked away from.

The bottom line:

This is going to be a major inflationary force in our economy and bears watching.. The big three automakers are already hanging on by a thread, and seeing costs triple for their biggest raw material cost is going to make it difficult to not raise prices on autos. If they don't pass it on its going to kill profits. This goes for anything else steel related.

My source explained to me that no one in the steel industry is happy with this development. Short term they will make a fortune, but everyone realizes their customers cannot survive such inflationary pressures for very long.

Manufacturers that have to absorb 250-300% price increases on a key raw material like steel will be in major trouble going forward. How do you pass such price increases on to such a weak consumer.

Go out and buy that car or hammer now before prices soar. If Walmart and the Big Three autos has accepted these price increase, you can be assured that some of it will be passed on to you.

I wouldn't want to be GM right now.

Must Reads:

More bad financial news:

Lehman(Oops!):

"June 9 (Bloomberg) -- Lehman Brothers Holdings Inc. reported a $2.8 billion second-quarter loss, the company's first since going public in 1994, and raised $6 billion to help it survive the collapse of the mortgage market.
The fourth-largest U.S. securities firm fell as much as 12 percent in New York trading after selling common and preferred shares at a price 13 percent below the close on June 6."

Ratings scam may be over:

"June 9 (Bloomberg) -- The U.S. Securities and Exchange Commission may recommend this week that Moody's Investors Service, Standard & Poor's and Fitch Ratings be prohibited from advising investment banks on how to earn top rankings for asset- backed securities, according to people familiar with the matter. "

Meridith Whitney strikes again. Looks like the monolines will force more writedowns:

"June 9 (Bloomberg) -- Citigroup Inc., Merrill Lynch & Co. and UBS AG may post further writedowns of $10 billion on their debt holdings after the two biggest bond insurers were stripped of their AAA rankings, according to Oppenheimer & Co. analyst Meredith Whitney."