SMU Data and Models

Contract Negotiations a Game Changer – What our Survey Respondents Think

Written by John Packard

In our recent steel market survey which we conducted this past week, 56.4 percent of those responding to our questions (all respondents) told us the current contract negotiations on their 2014 flat rolled steel needs represented a “game changer” for the U.S. steel industry.


We asked manufacturing companies if their contract negotiations included reduction in discounts (or higher steel prices) as part of the process to which 60 percent responded affirmatively.  We continued by asking manufacturers if they believed if their 2014 contract prices would be higher, lower or the same as the prices they currently enjoy from their domestic suppliers. Sixty Two percent believed their prices would be higher with 4 percent believing the opposite – that their prices would be lower. The balance believe that ultimately their prices will remain the same.

We asked manufacturing companies if the negotiations were causing their company to consider buying foreign steel rather than staying with their domestic suppliers. The manufacturing company respondents were split – 52 percent saying yes they were considering foreign steel and 48 percent saying foreign is not an option.

We also asked about the price spread between domestic and foreign and is it wide enough to justify buying foreign steel. Our manufacturing respondents responded with 55 percent believing the spread was wide enough and 45 percent not convinced (or not interested).

Even so, only 34.7 percent of the manufacturing companies reported that their company was actively entering new foreign orders at this time.

Service Centers

The percentage of service centers reporting their suppliers as reducing discounts (or higher pricing) on 2014 contracts was 90.3 percent.

Those believing they will end up paying more for their contract tons during 2014 was 68.6 percent with 2.9 percent believing they will pay less and the balance (28.6 percent) of the opinion their prices will remain the same as their current levels.

Much like the manufacturing companies discussed earlier – service centers were split on foreign steel. Of the service center respondents 52.4 percent are not considering foreign as an option with 47.6 percent considering foreign.

The price spread was considered wide enough to justify buying foreign steel over domestic by a narrow 52.7 percent to 46.3 percent margin.

Thirty nine percent of the service centers responding to last week’s survey told SMU they were entering foreign steel orders at this time. The majority – 61.4 percent – were not.

Comments Made During the Process

During the process we received quite a number of interesting responses which we thought our readers would be interested in reading:

“Change for change sake is never good. I expect things to be unruly for a couple years until another vehicle is formed to base contract negotiations on. It is a shame people cannot simply talk like the “good ole days” instead of having to depend on crazy mysterious mathematical equations with no real business basis.” Service Center.

“We are getting ready to see prices go thru the roof like it did a few years ago.” Manufacturing Company.

“A big question that could affect other mills is – will USS new management team be able to change the course to profitability or only find themselves giving back their small gains in 1st quarter?” Trading Company.

“The mills are showing discipline through this normal down cycle which may keep buyers on the fence thus creating steel needs Q1 2014.” Consultant.

“Seems like there’s talk of a “game changer” every few years, so it’s hard for me to imagine any pricing strategy that will make the game materially different. I believe fundamentals will ultimately shape whatever new game anyone tries to play. Monkey with the fundamentals, and the game will change.” Service Center.

“I think the big “change” will be that not many contracts get done and a large number of people end up buying on the spot market.” Service Center.

“I really don’t see much changing long term unless the dynamics of supply vs. demand change. As long as a mill is operational and they “need” tons, buyers will have “wants”. The back and forth game of cat and mouse will continue to varying degrees as the economy changes.” Manufacturing Company.

“It will be a definite change over past CRU bucket deals. The length of the change is determined by the joint success on both sides.” Service Center.

“Not a game changer but discounts off the CRU will be reduced and those mills that are particularly inflexible will be bitching about the lousy pricing in the spot market.” Service Center.

“We do not see anyone breaking ranks and expect customers to look at firm for Q1 and then come back to the market for balance of the year” Service Center.

“There will be a change but I a sure there will be unforeseen problems with the new method.” Service Center.

“or until a mill decides they want to increase their market share” Service Center.

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