The Covid-19 pandemic has generated significant uncertainty in the commodities market. Steel mill operators, for example, have responded by making capacity reductions, idling facilities or making full-blown closures.

Such tough decisions rest on assessments of a complex mix of market, asset and policy-related considerations. However, traditional scenario-based decision analysis does not take proper account of the value of flexibility associated with different approaches to managing excess supply. In this Insight we show how CRU Consulting’s Real Options capabilities can be used to help quantify and evaluate the range of financial outcomes in a way which takes account of critical interdependencies, thereby enabling better informed choices that are fully aligned with the risk preferences of individual firms.

Producers are facing massive disruptions due to Covid-19

Covid-19 has led to massive disruption across the global economy, critically impacting steel and other commodity industries. Global steel sheet demand, for example, is set to fall by 20% y/y in 2020 Q2 and by around 8% for the year. Such unprecedented and adverse market conditions raise fundamental issues for steel makers and other commodity producers regarding the management of their assets and portfolios.

Steel mill operators have responded by making capacity reductions, idling facilities or full-blown closures. Most recently, ArcelorMittal have announced that it has stopped output at its Zenica works in Bosnia. As of mid-April, aggregate carbon crude steel disruptions reached ~115Mt. These operating responses are closely monitored by CRU’s steel disruptions tracker.