The combination of higher spot prices for flat rolled steel and adjustments to contract negotiations has caused some steel buyers to seek alternatives to their normal domestic source of supply. Steel Market Update is beginning to get confirmations from both manufacturing companies and service centers of larger foreign tonnage purchases being made for 1st and early 2nd Quarter 2014 deliveries.
There is no way of knowing if the tonnages being purchased will materially affect the amount of orders to be placed on the domestic mills but, our assumption is, if the trend continues, the domestic mills will have issues arising with their order books by the time we reach late January and into early February lead times.
The issue is related to the efforts by a number of the domestic mills to alter the CRU “minus” and “bucket” deals which had become popular within the flat rolled industry over the past few years.
Recent 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” (i.e., 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.
Recently we spoke with a major manufacturer with locations across the United States who has been buying their business on a CRU minus basis for a number of years. They have been frustrated by the positions being taken by their domestic suppliers. Of critical importance to their company is the value their tonnage brings to a mill and how to recognize that value through better pricing than their smaller competitors.
“The index is an average,” the head of purchasing told us. “Someone is buying above it and some are buying below.” They explained it doesn’t make much sense to a large buyer to buy at the spot price average and not below the lower end of the spot range.
This manufacturer went on to tell us that as a “tier one” customer they feel there should be a 3 to 5 percent price difference between themselves and the tier two customer below them. Then there should be an additional 3 to 5 percent between the tier two and tier three customers.
The idea of a volume rebate did not sit well with this manufacturing company. The way they view the market is they will always be the largest buyer in their market segment. However, they looked back at 2008-2009 when the market collapsed. If those conditions ever happened again they told us, “…if the market falls in half and I cannot make my volume I would lose my rebate. Yet I am still the largest volume buyer and now I am at a disadvantage to my competitors.”
An executive with a large service center told SMU, “We have bought and are buying much more import. Our sourcing reasons include uncertainty due to the effect of a lower value for committing tonnage to some domestic producers in advance. Long lead-time purchases (imports) are committed volume for future delivery. If the values of these purchases are radically better than committing to future deliveries from domestic producers, it makes sense to increase your participation. Imports today are available at appropriate discounts to the forward curve. Today, there is no value being offered for committing tonnage to USS, NUE, or Severstal. They are intentionally driving their clients to the spot market for both price and volume. We can’t assess what that will mean to the market price or availability. Our best guess is much higher volatility of both price and demand.”
Steel Market Update has been hearing from a multitude of sources of higher interest in foreign due to the uncertainty surrounding the 2014 contract negotiations. We spoke with a trading company this afternoon who told us, “Our normal HVAC and roofing guys continue on as they get ready for next spring. What is different is the service centers who don’t like the prices they are being quoted and are coming to us.”
The trading company referenced cold rolled coming from foreign sources as being $4.00/cwt to $5.00/cwt cheaper ($80-$100 per ton) than domestic.
Another trading company told SMU, “I don’t know if I am seeing more inquiries, but I am seeing more import buys.” He told us the sale prices on the import buys for end of February arrival were $29.50/cwt ($590 per ton) on hot rolled, $34.50/cwt ($690 per ton) on cold rolled and $36.50/cwt for 20 gauge and heavier, CS/B, G60 coating.
When probed by SMU earlier today, a construction related manufacturing company advised us that they have already purchased 50 percent more foreign tonnage for 1st Quarter than normal. They went on to confirm what we heard from the trading company earlier that foreign cold rolled and coated prices were approximately $80 to $100 per ton below comparable domestic price offers. They also advised us that coated steel out of Europe was cheaper than Asia (going into an East Coast port).
A steel supplier with multiple CRU minus contract deals with end users told us, “I think people are going to be shocked when they see how much foreign steel is coming.” When asked what they were doing with their 2014 end user contracts they told us, “We are going to customers and telling them to hold tight. No one wants to be the first one to make a deal.”
A large service center told us, “… obviously increased import purchases means less domestic. However, we do not have a targeted strategy to move away from any supplier. We are happy to increase purchases in the spot market if that is the strategy of the mills whose product we represent. What we give up in consistency and reliability, we will likely gain in price.
Some mills have grown substantially in their understanding of the positives and negatives [associated with] index based pricing, the value of securing a future share of “spot”, the efficiency of orders in production, and the real cost of forward pricing based on averages of previous periods. But, the lead story in the 10/24 AMM said the tonnage level to earn rebates was a 1,000 tons a month. With all of the mighty rhetoric of new contract positions, 1,000 ton minimums let you know it that there is still isn’t very good thinking regarding how to influence the spot price.”
What is known at this point is negotiations continue with many – if not most – not yet having been finalized.
“The mills think inventories are too low and people will have to buy,” is what one end user told us earlier today. We asked when their company will need to buy again and they responded, “I have a CRU minus deal that goes through January. I don’t have to buy until late January or into February.”
The large service center we quoted above told us, “We have both extended existing programs and added new programs for 2014. Several mills [other than USS, Nucor and Severstal which they mentioned earlier] are involved.”
It appears in a few places the domestic mills are taking their lead from the U.S. Government and holding some of the existing deals for an extra month to as much as an extra three months in order to let the negotiations play out and for some clarity to return to the market.
One thing is for sure – the next few months will be interesting in the steel industry.
John PackardRead more from John Packard
Latest in Steel Products Prices North America
SMU Price Ranges: Sheet Rebounds – Sustainable Rally or Dead-Cat Bounce?
Sheet prices rose this week on the heels of a price increase announced by Cleveland-Cliffs last week that was quietly followed by other mills.
Plate Report: Mills Hold the Line Despite Slowing Demand
US plate prices have been relatively flat this year, especially when compared to sheet products. Case in point; SMU's plate prices stands at $1,455 per ton ($72.75 per cwt) on average, down 7% from a $1,560 per ton peak in April. Our HRC price is at $645 per ton, down 44% from an April peak of $1,160 per ton.
Nucor Maintains Plate Prices
Nucor Corp. will keep plate prices unchanged with the opening of its November order book.
Most Mills Still Willing To Negotiate Lower Sheet and Plate Prices: SMU Survey
The overall steel mill negotiation rate remained level this week vs. two weeks earlier, but plate’s rate fell by 15 percentage points, according to SMU’s most recent survey data.
SMU Price Ranges: Sheet Declines Moderate – Meaning or Noise?
Hot-rolled coil prices were down again this week, continuing a streak of week-over-week (WoW) declines that began in early/mid-July.