Coming Soon – Price Discounting Wars

Inventories and Margins.

These are two words I’ll be scanning for in the upcoming U.S. quarterly earnings transcripts.

Amongst a mid-cycle slowdown, I expect companies to engage in ‘price discounting’.

This may last 6 months or so, as companies are now holding too much stock.

This was partly driven by their desire to secure product by any means during a supply chain problems and paying too much for this scarcity.

Those higher ‘produced’ prices are a combination of rising commodity & labour costs.

In this May 2022 post about Lumber, 

https://robzdravevski.com/2022/05/23/lumber-back-in-focus/

I wrote the following;

“For those watching inflation, it’ll be interesting to watch how the higher prices of the past several months will affect lumber yards, timber truss manufacturers and homebuilders as they try to pass on higher ‘finished’ prices compared to the more competitive prices buyers of lumber can achieve today?”

Below are 2 examples of how that same story may be applied to competitors in the Hot Rolled Coil Steel industry.

Example 1

Let’s assume Company ABC bought their steel at prices somewhere within the shadowed areas appearing the chart below, let’s say it was bought at a mid point of $1,400 per ton….

then the steel is worked into an I-Beam as used in the construction industry,

then we add 30% in labour and production costs along with a selling margin,

the price of this ‘produced’ steel is now $1,800.

Example 2

While Company XYZ is buying steel at todays price of $930 per ton and after adding 30%, 

they are able to sell the same produced product for $1,200 per ton.

You can see how Company ABC may be pressured to discount their inventory and thus hurting their margins, let alone encouraging other competitors to increase production and gain market share.

Albeit, their inventory isn’t perishable, the unknown of whether market prices will return to their highs will play on Company ABC’s decision to hold or move their stock. 

This anticipated discounting this will be deflationary.

July 1, 2022

by Rob Zdravevski

rob@karriasset.com.au