Steel Products Prices North America

These are Interesting Times to be in the Steel Business…

Written by John Packard

There is a lot going on regarding contracts, contract negotiations and the timing of when orders/commitments need to be placed with the domestic steel mills. SMU has had direct conversations and seen email correspondence which suggests at least one of the integrated steel mills is pushing for remaining 2013 tonnage to be placed right away and a deadline is close for customers to order new contract material.

Contract negotiations, just like spot purchases, can be lead time sensitive. With a number of mills having lead times well into the month of December it is only a matter of time before January 2014 tonnage will need to be committed and placed.

The subject of the discussions are centered on how contract business will be conducted as we move into 2014. Back in April both Severstal and Nucor put out letters to their customers advising they would no longer quote contracts with a “discounted CRU price.” In other words, the practice of providing contract customers a guarantee of their numbers being below the spot market. In the Severstal letter dated April 17th they explain their reasoning, “We have found that discounts off a CRU indexed price do not always reflect market conditions.”

Nucor went one step further in their letter to their customers published on April 18th. Nucor not only eliminated discounted index-based contracts but also bucket deals. Nucor told their customers at the time, “Discounted index-based contracts have not demonstrated an equitable return for the commitments Nucor makes to our contract customers, such as: providing a longer-term price commitment, assurance of product availability, on-going technical and administrative support, and strategic commitment to the mutual benefit of Nucor and our valued customers.”

Most of the other mills located east of the Rockies are following the Severstal and Nucor positions and have eliminated or greatly reduced discounted index-based contracts and replaced them with other options.

At this point, amongst the buyers – both manufacturing and distributors – there is no panic and the industry seems to be set on waiting to see what happens. However, there is a certain amount of frustration associated with the changes being requested.  Here is a good example of the comments being made to SMU by active buyers:

“…we’re all collectively scratching our heads wondering what, if anything we’re missing in the mills’ approach.

I said to one peer, if their ultimate objective is to move us to Spot, why don’t they just come out and say that, and say they aren’t interested in contracts? He told me he had squarely asked mills that very question, and they said that they absolutely wanted/needed contracts, but they needed to do away with discounts! Which then just returns you back to the retort of, “then what’s the point?” It’s becoming a bit of a circle jerk where the mills keep saying the same things without appearing to understand the lack of logic in their approach. I suppose that maybe the mills believe that buyers are so used to the programs and like the benefits so much, that they’ll ultimately sign on at little to no discount.”

The subject is at the forefront for anyone who buys contract tons and one of the mills wanted our readers to understand the reasons behind the increases being requested at this time.  A mill executive laid it out this way for SMU, “I don’t know why everyone can’t get it thru their thick heads that if the Mills don’t make money (increased prices) we’re all going to be looking for a job at Starbucks….but not the Starbucks that is near a mill.”

We are finding at both service centers and end users the initial positioning process has just begun in some cases as mills fine tune their pricing positions.

Steel Market Update (SMU) is aware many of the mills have taken very strict positions with limited, to no negotiating room, for adjustments. A number of the large mills are working on full CRU or Platts pricing as the starting point in negotiations with any discounts being discussed are being tied to extras or freight considerations. From a number of the mills we are seeing incentives being offered on following through on tonnage and delivery commitments in the form of a modest back-end loaded rebate.

We are also hearing of base price plus scrap surcharge negotiations which would be adjusted on a monthly basis (similar to what Nucor has done in the past with their AMM Chicago #1 Busheling adjustments). Of course the kicker is determining where the original base price needs to be prior to adding the scrap surcharge.

SMU learned from two customers – one service center and one end user – that one mill is offering 3, 6 and 12 month fixed price contracts. In the original letter put out by Nucor they mentioned they would consider firm pricing out as far as six months. We heard differing comments regarding the ability to adjust pricing after the locked-in pricing period based on some form of index.

SMU spoke with two corporate directors of purchasing for large manufacturing companies late last week and they both pointed to one area of concern they have is not being able to get a guarantee that contract pricing will be below that of spot. One of the companies told SMU, “The mills haven’t thought through their contract offers to customers to make them feel that they are getting a better price than spot.” That same company explained to me that there needs to be a change in the supply situation which makes it advantageous for their companies to commit to tonnage and pricing at levels being suggested at this time.  

A few deals have gotten done.  But, we are still early in the process and most buyers are waiting for news to leak on what the early deals entail and believe negotiations could continue for a number of weeks – out to Thanksgiving or beyond.  One manufacturing company told us this past week, “I don’t want to be one of the earliest ones [to cut a deal]. I hope to get my contracts done by Thanksgiving.”

“There are not too many times when mills pricing practices get turned upside down,” is what one OEM told us. “This is an interesting time to be in the steel business.”

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