Final Thoughts

When I was representing Winner Steel (NLMK Sharon Coatings now) there was no such thing as a discounted contract price. At least not at that mill. At that point in time we were quoting prices that were approximately $20 per ton (or higher) above the current spot price which we would then lock in for a quarter at a time. The thought process being that the contract customer had their cost locked in over a period of time and eliminating the volatility which had been plaguing the market.

When I left the mill at the end of 2007 they were just warming up to the concept of using the CRU price assessments as a way of allowing contract customers to move in line with the spot market and not be at a disadvantage. The number of contracts were limited to our best customers with the most difficult end-use applications (pre-paint, EDDS, Graded steels, etc.).

Service centers sold their end users based on value-added services and not just price. The service center certainly did not offer end users prices at, or below, those being offered by the domestic steel mills. The exception to that rule was in those areas where it was cheaper to bring in foreign steel and the mill had a freight disadvantage (example: Houston).

At lot has happened since that point in time.  Somehow, the mills made the decision that it was in their best interest to provide lower than spot numbers up front to contract customers and then have them adjust against CRU spot pricing thus assuring the contract customer that they would have an advantage. In return, the mill got to steady load their mill – lead times shrank and on-time delivery improved at most mills.  Over the past year volatility has been modest – although this could be due to slower growth in China, relatively level commodity prices and supply constraints due to equipment failures, labor issues and normal maintenance as well as only very modest improvements in demand here in the U.S.

What the mills didn’t think about was by allowing commodity items (example: 48” & 60” galvanized coils) to be bought on CRU minus deals that they would erode the spot market price. Over the past couple of years I have heard from many distributors that when negotiating spot pricing the first thing they did was to calculate where their competition was buying on a CRU minus basis and that became the starting point for spot negotiations.

The other thing the mills did was to offer “foreign beater” prices. If these items ended up in the spot market once again they were used against the mills in determining where the spot prices should be.

Buying at CRU minus “X” percent is a no brainer for the buyer. The risk is transferred to the mill.

In 2007 the business term being over-used at the time was “win-win” and there is no win-win in CRU minus deals (in my opinion) that exceeded more than a few percentage points.

So, my opinion is the domestic mills have no choice but to try to come up with another formula which returns them to a level playing field from which they can negotiate “win-win” pricing agreements with their customers.

Regarding spot prices – it has been my practice to allow the domestic mills (when moving en masse) an opportunity to make their case to their customers as to why prices should rise at any particular point in time.

If the mills push prices beyond a “reasonable” range then what will most likely happen is when the market adjusts the movement will be much more volatile than it may have been otherwise. I know one of our contributing writers: Andre Marshall of Crunch Risk, LLC, believes the market fundamentals will always prevail. He is of the opinion that there is an over-supply situation both in the United States as well as the rest of the world and that prices will have no option but to move lower in the coming months.

I think there is a chance the domestic mills will be able to get through the balance of the year without making wholesale “deals” on late December tons. The expectation is for buyers to return to the market during the early 1st Quarter and then volatility will kick in as the quarter progresses assuming no exceptional changes in demand or supply dynamics.

On another topic: The Association of Steel Distributors (ASD) will hold their 2013 Fall Conference in Las Vegas on October 24th through the 26th. AK Steel President & CEO, James Wainscott will be honored at the Captain of the Industry dinner during the conference.  More details can be found on the ASD website: www.steeldistributors.org

On December 5th the American Institute for International Steel (AIIS) will host their 63rd Annual Dinner in New York City. The keynote speaker will be John Correnti, CEO of the soon to break ground Big River Steel. More information can be found on the AIIS website: www.aiis.org

Steel Market Update will conduct our mid-October steel market survey beginning on Monday, October 14th at approximately 8 AM ET.  Please look for your invitations to participate and click the link contained in the message.  We live in interesting times…

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