Steel price are up. You may recall that I wrote about the improving outlook for steel back in January and several times prior to that in December. I named some stocks and one in particular, Commercial Metals Corp (CMC), which is up about 40% from where I recommended it. I also mentioned several of the bigger names like U.S. Steel (X), ArcelorMittal (MT), Nucor (NUE) and Schnitzer (SCHN). They all have been doing well, as steel prices have been recovering.
MEPS (stands for Managing Engineering and Production Services) is an industry consultancy that reports on steel prices and it is reporting that prices have experienced a modest rise in March. The reason MEPS gives for the price advance is an improving supply situation. Here is what it said in its latest report:
"Supply-side factors are starting to provide a boost to global steel values. As a result, the MEPS world steel price advanced, in March, for the third successive month."
No doubt that supply had something to do with it, but there's another factor: pricing power is returning. Very simply, producers can put the price up for the first time in a long time.
I have always said that markets are about price and not quantity. Some entity or group sets the price in response to conditions. In the case of steel, it is the large producers and exporters. They're the ones with market power, and their pricing power is returning. The price cutting and discounting that we have seen for the past year or more is over, and there's an explanation for that, and it is not about the slightly better supply situation.
So, what is the reason?
I will answer that question by saying it's the same reason that Samsung just blew away profit forecasts this morning. The company's earnings handily beat Street expectations. Samsung ended its latest quarter (March) with a profit that was more than $1 billion above expectations. Clearly, huge.
So what am I talking about? Steel? Phones? Prices? Profits? Where is the connection?
The connection is, once again, flows; as in, what I always talk about. As spending by the U.S., government surges higher this year to near record levels, that money flows to the income of individuals and firms all around the world. Pricing power goes up. Profits go up. Investment goes up. Savings go up.
You see, once you understand flows, these things become totally predictable. The "mystery" of what drives income, profits, the economy is totally stripped away. It's like looking behind the Wizard of Oz's curtain.
Right now, it's mainly the U.S. and China that are supplying the bulk of the flows, and that is good, but as I said in my column yesterday, there are still very strong headwinds against the global economy, so the flows must be maintained or else the economy will stop dead in its tracks, or worse. I am optimistic; I believe we will see enough to stay on course.
We could do better, however. If Europe were to kick in, then we'd see a veritable global boom. However, who knows if that is going to happen? They seem wedded to their disastrous, economy-crushing austerity. Maybe once Britain leaves the EU -- Brexit -- that might be the catalyst for some fiscal "normalization" -- but again, who knows?
As an aside, I see that Jamie Dimon is predicting dire things from Brexit if that happens. Personally, I think it will be no worse than the situation we are seeing now; but on the other hand it holds the potential to be a lot, lot, better, so I disagree with him.
As for the market right now, there's been a lot of worry going into this earnings quarter, but my guess is that the news will be more good than bad. It will echo what we are seeing from Samsung.
I know there are many who want to sell. They want to sell so bad, and sometimes I can't blame them, because the rally at times seems so reluctant and hesitant, but that's the market, most of the time. You have to get used to it. When it goes straight up, those are the times you have to worry.