Steel Products
SMU Survey and Index-Based Contracts
Written by John Packard
January 25, 2013
The issue of excessive discounting against CRU and other index-based issues raised by ArcelorMittal in their price increase announcement are ones which Steel Market Update has been researching and which we began raising in our last steel market survey. During conversations with service centers, steel mills and end users we were catching frustrations with the contract negotiation process and we have been curious to know how deep these concerns might run. SMU is not ready to run a major article on the subject as it is a fairly complicated one, but we will provide the results from last week’s survey where we asked a couple of questions on the subject.
We asked the service centers how many purchase steel based on the CRU or other index-based formula from the domestic steel mills. We found 61 percent of the service centers do purchase at least some portion of their steel on an indexed basis.
SMU asked the distributors how many of them were increasing the number of index-based contracts they have with domestic steel mills and 21 percent responded they were expanding the number of contracts.
We then asked the service centers if they were seeing any resistance from either the mills or their customers to future index-based contract purchases and we found: 58 percent reported no resistance, 27 percent reported their customers were resisting, 9 percent reported the mills were resisting and 6 percent reported both the mills and customers were resisting.
Our mill respondents were also asked a question regarding index-based contracts and their company’s desire to increase, maintain or reduce their expose to these contracts. Of those responding to our survey – and I must warn you the response rate is not large when compared to our other groups – 14 percent reported their company wished to increase their exposure, 57 percent maintain and 29 percent reduce their exposure.
We did not collect any comments which shed any meaningful light on the results and this subject needs further research and review to determine if there is a trend developing regarding index-based contracts, as both buyers and mills struggle with spot inconsistencies from mill to mill and market to market.
John Packard
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