NEW YORK Mounting frustration with the CRU-minus-discount approach to flat-rolled steel pricing and what many U.S. mills perceive as the practices erosive effect on sales margins erupted in full force April 16 when the commercial leadership of ArcelorMittal USA LLC told the companys sales team that it will no longer enter into any new agreements based on a discounted CRU.
We believe this pricing mechanism has become more prevalent and is causing an unnatural ceiling price, and therefore is undermining our ability to collect a fair market value for our products, the leadership said in an advisory seen by AMM. The Chicago-based steelmaker went on to say that for the balance of 2013, it will offer firm price agreements for monthly, quarterly and six-month durations that assume volume and price is sustainable for all parties.
We will consider competitive situations on a case-by-case basis for longer-term agreements, but it is not our intention to enter into agreements based on a discounted level to CRU, the advisory stated. If a reference to the CRU index is required, we will use CRU as a minimum price only.
CRUs U.S. hot-rolled coil index assesses steel sheet prices in the Midwest on a weekly basis. The company also publishes cold-rolled coil, hot-dipped galvanized coil and steel plate price indices for the Midwest. According to London-based CRU, more than 50 percent of mills direct shipments of steel sheet are priced against CRUs U.S. Midwest price indices, representing some $20 to $25 billion worth of business each year.
ArcelorMittals move to discontinue its use of the indexat least in partcomes at a time when hot-rolled coil prices have slipped to around $600 per tonand in many cases lowerwith AMMs average transaction price at $590 per ton f.o.b. Midwest mill Tuesday. With some mills facing a breakeven point at right around that mark, any discounting below published index prices could mean a narrowing of marginsor even a fall into loss-making territoryfor some mills.
Market reaction to the action was mixed.
They (ArcelorMittal) have been the most vocal about not liking it (pricing off a discount to the CRU hot-rolled coil price index), a Mississippi Valley sheet processor told AMM. I agree with their assessment, and I would like to see everybody follow them.
I dont think anybody should be shocked by this, a Midwest distributor and processor said. They have been beating this drum since the beginning of the year, even before. And we have been hearing the same message from the other mills. It is very pervasive and consistent throughout the industry. This type of pricing program and structure is hurting them all.
This isnt the first time ArcelorMittal has expressed its concerns with the current pricing format. In January, the steelmaker said in a letter to customers it was raising hot-rolled coil prices immediately, attributing the need to act to market manipulation and discounting off the index, which ArcelorMittal said at the time had a dampening effect on industry spot prices (amm.com, Jan. 23).
The key question now is what this will mean for existing contract structures, the Midwest distributor and processor said. Are they going to be trying to restructure existing contracts? I cant imagine that, he said. There would be quite an upheaval.
Now that this has started, more (mills) could jump in, a top executive with a national metals distribution chain said. The real question is what happens when they have to stand up to consumers like John Deere or Caterpillar.
An ArcelorMittal spokeswoman declined to comment further on the move, noting that we do not discuss pricing in the public or with the media.
Corinna Petry, Chicago, contributed to this story.