Final Thoughts

November 26, 2014

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I got the following question from a manufacturing company over the Thanksgiving holidays, “What are you hearing if anything with index based contracts given the huge and sustaining gap between domestic and world market pricing. Example: If one sets a contract with a service center and they have it indexed to a domestic point (ie CRU HRC Mid-west) and the service center then sources offshore the potential margin on this contract is huge. I was wondering if you had heard of anyone dealing with this and if so what they were proposing to level the competitive horizon for us manufacturers?”

I am responding to this question in my final thoughts – which is the area I use to voice my opinions.

First, I am not against a strong positioned service center from making a buck on their ability to source world-wide. There is risk involved with a foreign sourcing strategy that could come back to burn the service center. Two examples come to mind – late deliveries which would force the service center into the spot market to pay whatever price to honor their contract. The second problem would be what happens should the domestic mills file a dumping suit on the product (and the country)?

Having worked for 21 years in the service center industry and then another 10 years on the mill side, my opinion is the manufacturing company needs to negotiate pricing that allows the manufacturing company to make money and grow their business. At the same time the manufacturing company has to have the quality and service necessary from their suppliers in order to minimize possible downtime and delays in production.

If the manufacturing company has a close and trusting relationship then I think the threat of excessive margins at the service center becomes less of an issue. The distributor would tend to offer their customer an opportunity to “share” in the risk that comes with foreign steel.

My experience in the industry has taught me, “What goes around, comes around.” Good customers let their suppliers make money and good suppliers share with their good customers.

That’s my opinion – I think there are some manufacturing companies and distributors out there who might have different view points. Feel free to send them to me: John@SteelMarketUpdate.com.

As always your business is truly appreciated by all of us here at Steel Market Update.

John Packard, Publisher