Cyclicality of the Metals Industry
What is a cyclical industry?
The business cycle is a type of economic fluctuation which consists of expansions and contractions (recessions). It is typically described as being composed of four periods - expansion, peak, contraction, and trough.
Most sectors of the economy have a hard time during contractions and troughs (one interesting exception is the so-called Lipstick effect - when consumers spend more money on small items during recessions, because they have little cash for larger purchases). With business slowing down, costs rising and partners going out of work it is not easy to make a profit during the downturn of the market.
The industries which have it the hardest during recessions however are the industries which are highly sensitive to the business cycle, or the so-called cyclical industries.
In a B2C environment usually non-essential utilities have a cyclical nature, since consumers don’t prioritize buying them when times aren’t good. On the other hand consumers will always need to pay their water bill, rent and other necessities.
For the business world, things are a bit different. When an industry is heavily linked with the economy it follows the recession and expansion cycles. Filling your order books fluctuates with new projects being confirmed by clients and new projects confirmed are heavily correlated with good visibility on the economy.
Why is the metals industry cyclical?
The metals industry is a highly cyclical and reflective of overall market conditions industry — demand increases during economic booms and plummets during global recessions. The main reasons for this are the sheer size and complexity of the metals industry as well as its connection to almost all other larger parts of the economy.
Connection to other industries
Steel and other metals play a key role in the automotive industry, construction industry, oil & gas industry, domestic household sectors and practically every other large industry in the world. Metals and the oil & gas sector for example are very tightly intertwined and dependent on each other. This is because they use materials produced by each other. When one industry suffers, the other one follows. The same can be said about the automotive industry and any other large industry in the production sector, since they are all dependent on metals.
To put it simply: When the economy is slowing down, the overall demand for metals falls. As a result prices are going down until the market is adjusting between supply and demand.
Vanilla Steel impact for the metals industry during the business cycles
As an online metal trading matchmaker across EMEA, Vanilla Steel helps buyers and sellers in all market environments.
Through digitalization and customer support, Vanilla Steel enables matchmaking between metal buyers and sellers by automating the negotiation process. This happens via Auction cycles - initiated by the suppliers, or the RFQ (Request for Quotation) - initiated by the buyers. In shortening the sales process, both buyers and sellers limit their exposure and risks in a volatile environment.
Additionally, Vanilla Steel supports metals suppliers in moving faster their stocks or liquidating inventory if need be.
In the current slow environment, demand is slow and supply is high. Buyers can choose between many alternatives, which is helped by our RFQ tool. You can submit your requirements, compare and choose the offer which best suits your needs.
Read more about our RFQ tool by clicking here.
Additionally, suppliers need to explore new sales channels. Usually online sales have not been optimized yet. Vanilla Steel can support their online sales activity to win new customers and new markets. A steel digital platform can bring data and efficiency to the ecosystem, as digitization allows the supply chain to reduce its running costs which increases overall competitiveness.
Conversely, when the market picks up and prices are rising, Vanilla Steel is providing a hedge to buyers as they can secure materials in a much more efficient way by using Vanilla Steel as a trusted third party to make sure the transaction terms are met.
If you are interested in selling or buying on our platform, it has never been a better time. Times of crisis are times of opportunities. Please simply request a demo by clicking here or contact us at info@vanillasteel.com
Sources
1. https://www.investopedia.com/terms/l/lipstick-effect.asp
2. https://www.investopedia.com/terms/c/cyclical_industry.asp
3. https://www.investopedia.com/terms/b/businesscycle.asp
4. https://corporatefinanceinstitute.com/resources/knowledge/economics/cyclical-industry/
5. https://www.forbes.com/advisor/investing/how-long-do-recessions-last/
6. https://www.frost.com/frost-perspectives/challenges-and-opportunities-steel-industry/
7. https://worldsteel.org/steel-topics/statistics/steel-statistical-yearbook/
