We are reaching the end of 2012. A few days left in
Dec 2012, before the new year sets in. The good news is that most of the stock
markets will record a year of gain and hopefully many investors will walk into
the New Year with a smile.
Many steel traders may also look forward with hope
as major steel companies such as Arcelor Mittal (MT), etc. have witnessed some
revival in its share prices recently. MT which touched USD 100/- per share in
mid-2008 had crashed to sub-USD 14/- levels along with the collapse in steel
prices.
It is an interesting story. Not only had the
shareholders of MT faced a bumpy ride, the volatility in steel prices during
2007/08 period made many a steel trader bankrupt in 2008/09/10.
Steel Bubble
Steel prices which stood at $500 level in Dec 2006
touched $700/- record high in Dec 2007. Thereafter it zoomed to $1540 by July
2008, at the peak of commodity bubble, as evident from the chart below.
Source: mesteel.com
The problem was that many a normal ‘steel
businessmen’ caught up in this whirlwind of speculation and when the bubble
deflated by late 2008 to $480 levels, found themselves bankrupt!
Reasons for Steel Bubble
There were stories of steel becoming scarce due to
several reasons – booming construction all over the world (GCC, China, US,
Spain, etc.) which itself was credit fuelled.
Many businessmen switched to steel trading enticed by the profits and
stories, which included that the entire years production of steel mills being
pre-booked, etc. Moreover those were
crazy times of credit fuelled inflation!!
Real life example
There is a reason why I write this now. After a gap
of about three years, I met an ex- CFO of a steel trading company, who
reminisced about the crazy days off 2007 and first half of 2008. In fact from
2005 onwards, the steel prices were on the uptrend and it is like the gold
prices of today. Just one way direction!
Attracted by the uptrend
since 2006 many business men diverted their capital (exiting perfume
manufacturing, textile retailing, etc.) to the lucrative steel business.
Together with the credit facilities, they bought and stocked more steel which
became almost like a precious metal.
Regular steel traders panicked and also began to stock more. And
a borrowing customer (during my banking days) decided to do exactly that – hold more
stock in view of the booming prices, which was supported by the research
conducted by experienced purchase managers and industry experts. However, when
the market crashed, the CEO, CFO and the Head of Purchase and Sales found it
difficult to offload as the demand suddenly vanished. The aftermath of holding
substantial inventory with borrowed funds in a crashing market is quite
predictable! The proud CEO of this company, who was once chased by Private Equity
(PE) firms with attractive offers, was humbled as he agreed to rather
humiliating terms set forth by creditors (including banks) to restructure the
credit facilities he took to finance his overpriced stock.
It took several years for the company to stand on
its feet. He was lucky to survive as many of his competitors had either fled
the UAE or faced jail terms for not settling business dues.
