SMU Data and Models

Buyers Say Contract Talks More Adversarial Than Usual

Written by Tim Triplett

With steel prices trending downward as 2021 comes to a close, there is a different tone to annual contract negotiations, respondents to Steel Market Update’s market trends questionnaire said. Talks are more contentious, reported many buyers, as mills seek to lock in volume near current prices for 2022, while service centers and OEMs are reluctant to sign a deal today when steel will likely be cheaper tomorrow.

surveySMU asked: How do contract negotiations differ this year versus last year?

Judging by the flood of emotional comments from buyers, market factors have made contract talks unusually adversarial this year:

“Late in discussions…there’s a lot of uncertainty on both sides in how to approach it.”

“Mills are not giving very much of a discount to their loyal customers on this year’s contract (for now). Import prices are so much lower, they will eventually have to yield to the downward pricing pressures or lose some market share ”

“The mills are in a better position to get higher prices, with slightly tighter supply and relatively low inventories. Price negotiations favor the mills, and the pricing shows it.”

“Domestic mills have a distinct advantage, and contracts are negotiated through the lens of a supply shortage from 2021.”

“Contract negotiations are much stricter for 2022. Very few discounts or reductions are allowed.”

“Discounts are smaller and not on pace with the declining market.”

“The vendors are looking to put adders on top of index prices.”

“Mills are bullish with little room to negotiate. They are offering volume, but at high prices.”

“The mills succeeded in reducing discounts, freight allowances, discounted extras and tonnage volume flexibility.”

“Mills are giving half of what was offered in the past. Talks are extremely adversarial.”

“There’s no comparison. Contract talks are much more difficult and in many situations a much more adversarial tone. We know changes needed to be made, but the idea of finding a win/win seems to have been lost with some of our ‘partners.’”

“Negotiations started and ended sooner. No concessions on extras or freight.”

“Mills made more metal available to OEMs, but at higher numbers then in 2021.”

“We won’t see the steady monthly increases in 2022 like we did in 2021. That changes the discussion.”

“2022 contract talks started strong from the mills, but they have softened as prices have been dropping.”

“End-users remain more focused on supply chain continuity. After many years, the value of the supply chain has become important.”

“Just the high levels and  pure dollars are unlike anything we’ve seen before. It’s wild to be negotiating at these figures.”

(Editor’s note: In fairness to steel mills, note that only steel buyers had an opportunity to respond to this question. The comments above do not represent both points of view. SMU would welcome comments from producers with their observations on current contract negotiations.)

SMU asked: Will the removal/modification of Section 232 on the EU and other countries result in lower steel prices?

Most respondents (82%) believe the changes to Section 232 will open the door to more imports and add to the downward pressure on steel prices.

“Prices will erode to come close to current import prices. The time period chosen to set the volume for the quotas was a slow import time from Europe. Volumes will exceed the quota very quickly. The tariff rate quota is smoke and mirrors.”

“Not if the mills can discipline themselves…sell less steel, make more money. I already have seen those foolish words ‘foreign fighter.’ Let’s see if they can hold onto success.”

“EU alone, maybe not. If other countries get excluded as well, which is likely to happen, then I believe it will have an impact on prices.”

“Lower steel prices from the EU for sure. How they affect overall prices is not clear.”

“I do not anticipate prices dropping off the cliff… more a tire leak over a longer period of time.”

“With the limits/quotas now in place, it think it’s more likely EU producers will focus on exporting high-value vs. commoditized products. Much less likely to ‘dump’ marginal material.”

“Quotas and the rising cost of carbon could offset the lack of a tariff.”

“Just another negative for a market that is already much weaker than most folks understand or are willing to admit.”

SMU asked: Are you an active buyer or staying on the sidelines?  

The declining steel prices have split the market, with about 40% of buyers taking a wait-and-see approach to purchasing for inventory.

“Waiting for a realistic price.”

“Only buy what we need, and need what we buy.”

“Our inventory levels are healthy, and I see things softening at the mill level. See you in ’22!”

“We have enough contract volume to fulfill what we need until auto burns through more of their pent-up inventory.”

“We don’t need any steel until February. Demand, while stable, is not as robust as it was mid-year. Two primary factors. 1) seasonal slowdown, 2) labor and material constraints are limiting downstream production.”

“Price declines will accelerate as capacity comes online in Q1.”

“It’s hard to catch a falling knife.”

SMU asked: Where do you think HRC prices will be at year end?

SMU’s check of the market last week found the average HRC price down $50 to $1,780 per ton. While most believe prices will moderate further, the majority see relatively small declines, leaving hot rolled prices in the $1,700-1,800 range at the end of December. Nevertheless, caution is in order. About one-third believe HRC could dip below $1,700 in the next five weeks.  

“All the mills will fight to fill order books and compete with foreign.”

“Pricing is sliding, but I don’t expect it to cascade anytime soon. This feels like more of a ‘reset’ than a ‘correction.’”

By Tim Triplett,

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