Steel Products Prices North America

Early Mill Contract Negotiations Are Creating Interesting Chatter

Written by John Packard

Earlier this year a number of mills announced that they would no longer accept CRU minus based steel contracts. Since at the time most flat rolled steel contracts were negotiated to go through the end of the calendar year we did not see how the mills were going to approach the subject until just recently. It is still early in the process but we thought our readers might be interested in what we are hearing is being offered in the early rounds of contract negotiations.

Here is part of a conversation we had with a large service center buyer late last week and then again over the weekend:

“I should have mentioned earlier that there appears to be lots of conviction across the mills right now, for moving away from CRU less front-end discount…
For an annual contract, with monthly adjustments, they’ll use an index (Platts or other) and you pay actual price from the prior month (there are variations of what to use – specific day, 10 day average, etc, but they want to use info from earlier in the month so orders can be priced in time). Then, depending on volume the discount is between $5-10/ton via rebate (qtr/annual/etc), post shipment. I think this is fairly consistent with other mills – the Minis for sure.

While it’s fine that the mills want to correct their perceived errors from the past couple of years, they appear to be way over-correcting in thinking that $10/ton for “large” volume is going to cut it. So, you pay the straight-up base to start, and you get a weak discount for large volume. At today’s price, the $10/ton = about 1.5%. Therefore, for giving the mill a firm, annual, large tonnage commitment, placed monthly, you might get a 1-2% discount (paid via lag rebate) vs. just buying Spot.

My takeaway is the mills must want to convert much more of their book back to Spot given their early contract approaches for 2014. They had better be careful what they wish for because they might get it – less reliable/regular volume, and an increased need to front-end discount to get orders, which was supposedly the problem they were trying to correct in the first place!”

Another large service center told SMU in an email earlier today, “2014 contracts have not yet really gotten going yet. However CRU and Platts based deals, with various adjustments, will be available as they are currently being offered by several mills. We’ll see what happens with regards to volumes, OEM and distributors, directed buys, and fixed prices based on previous quarter (or half) averages. Shifting away from indices would be very difficult for mills, but they may be able to make some progress with “new” deals while they keep existing ones with some modifications.

Another steel buyer told SMU, “The mills will get better deals than they did last year. I think they will get away from the CRU especially for the smaller players…Next year there will be higher transaction prices.”

While a large service center VP of Purchasing told SMU, “Nucor is quoting Platts with no discount. ThyssenKrupp is quoting some numbers which are reasonably good. They are going to keep track of the number of tons on both contracts and spot. You have to agree to buy so many tons per month.” This large buyer went on to say that they were being quoted firm fixed pricing for six months with an agreement for fixed monthly tonnage commitments.

A medium sized service center out of the Midwest confided in SMU regarding their negotiations on 2014 contracts with their suppliers. The buyer spoke to us about three specific contacts which were in the process of being negotiated.  All of the contracts were CRU minus deals for 2013. The buyer told us, “I think these CRU minus contracts have a lot of value to customers.” He went on to point out, “Program deals provide consistency of volume.” He told us Nucor and ArcelorMittal were being the most adamant regarding changing the contract prices and pricing mechanism. “Nucor is focused on changing the mechanism and is not listening to their customers. NLMK, AK are willing to feast on the Big Three.”

We are still early in the process of negotiations for 2014 contracts. We have a ways to go before we find out if the domestic mills were able to reduce or remove the CRU minus and “bucket” deals from their order books.

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