Based on a number of conversations Steel Market Update (SMU) has had with service centers over the past couple of working days, there appears to be concern that the domestic steel mills are actively looking to take end user contract business away from the distributors.
While it is still early in the negotiation process SMU is catching signs of at least a couple of the mills treating the distributors differently than the end users. We are being told by a few service centers that the mills are quoting either the same or lower flat rolled steel prices to the end users than the distributors. The thought being that once margin is added the business will go direct to the mills from the end user and not through the service center.
We got a lengthy email from an end user who is about to begin their contract negotiations for 2014. They had some interesting insights that we thought our readers would find interesting:
“We’re in the process of entering into those conversations after having first broached the subject in June with various mills. Our thought at the time was that we’d get in front of the contract price model issue and plant the seeds that spot pricing needed to be above contract pricing for any indexed pricing model to work.
I’ll be very interested to see how the upcoming conversations go with them.
The mills are the ones that broke the CRU model by discounting contract prices and offering it to the spot market. The mills in turn played the blame game and forgot to look into the mirror to see that they were undisciplined in approach to the market by trying to grab sales and in fact were the problem all along, not the spot market players. The result was that the mills indicted the entire indexed model process and blamed everyone for the market eroding in spiral fashion instead of fixing the basic approach to pricing the spot market.
The mills have always looked at the service center community with disdain. In my 28 years, the mills have looked at service center business as being a necessary evil, but as still being evil. In other words, the mill needs the business to secure capacity utilization, but also believes that they should be servicing the OEM business themselves.
The end result is that the market cycles and the pendulum swings back and forth. When the market is indicating basic strength, the mills penalize the service centers by offering contract pricing at or above the pricing offered to OEM’s. When the market is indicating basic weakness, the mills incent the service centers to buy tonnage by offering contract pricing at a discount to the pricing they offer OEM’s. For that matter, when the market is weak, the mills also look at OEM business as being captive and don’t offer any incentive to keep them in place and by consequence, forget that OEM’s have other options.
Your research seems to indicate that we may be in the former situation whereas the mills believe the market is beginning to exhibit strength. Whether or not this holds true remains to be seen…currently we don’t see the fundamentals in place to support market strength.
If our position is correct, then certain mills may be talking the talk and not walking the walk. That said and if we are truly at a market inflection point, then we should in fact see some reasonable offers come contract settlement time in deference to the saber rattling that we heard no more than a couple of months ago.
I’m not sure if this effectively answered your question or not because we haven’t actually entered into formal negotiations as yet, but it at least provides a nutshell approach to the upcoming dialogue.”
John PackardRead more from John Packard
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