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More mills expected to stop CRU discounting

Keywords: Tags  CRU index, ArcelorMittal, hot-rolled sheet pricing, discounting, steel mills, steel distributors, Corinna Petry

CHICAGO — ArcelorMittal USA LLC’s announcement that it will cease selling hot-rolled steel priced off a discount to CRU Group’s index could see strong support from other steelmakers, sources said, noting that the discounting practice has nearly destroyed the flat-rolled market for producers and distributors alike, with no one getting a decent margin.

"(ArcelorMittal) should be applauded for this because ‘CRU minus X percent’ is destroying the value proposition in the distribution business, and probably in the mill business, too," one Ohio distributor told AMM. "If you are a mill, you completely destroy your franchise (selling at a discount). ... There is no more spot market. The spot market is CRU minus."

A number of market players have been expressing discontent for some time with the established practice in which mills sell steel at a percentage discount to the CRU index number, rather than at the actual listed index price itself, sources said. The Chicago-based steelmaker appeared to be the first to publicly do something about it, however, telling customers in an April 16 advisory that its sales team will no longer enter into any new agreements based on a discounted CRU and suggesting a general desire to move away from index-based pricing overall (, April 16).

"If a reference to the CRU index is required, we will use CRU as a minimum price only," the company said in the letter earlier this week.

Several mills are said to be mulling plans to echo ArcelorMittal’s leading move to cease discounting off CRU prices in flat-rolled contracts, a number of market sources told AMM.

"I can tell you they’re not the only ones looking at it," one mill source said.

Sources said that several mills, including Pittsburgh-based U.S. Steel Corp. and AK Steel Corp., West Chester, Ohio, were among those considering moves to back away from CRU discounting programs. U.S. Steel didn’t return AMM’s calls, while AK Steel declined to comment. CRU also couldn’t provide comment April 17.

Most sources said the issue isn’t necessarily with the index number itself, which assesses average sheet purchase prices in the Midwest on a weekly basis. "Overall, I feel the index has been fairly accurate," one Midwest processor said.

But with companies almost universally buying and selling at a percentage discount, actual sale prices have fallen below some mills’ breakeven points, with one source noting current discounting puts his hot band at around $565 per ton. That compares with AMM’s published hot-rolled coil spot price of $590 per ton f.o.b. Midwest mill.

"It’s insanity to get 5 percent (below CRU), let alone 8 percent. We’ve heard numbers of a 10-percent discount; that’s $540 (per ton)," an Illinois distributor said.

Buyers universally complained that producers have lacked the discipline to raise prices and stick with them, but one distributor also said service centers are using CRU discounts to "squeeze blood from a turnip." Some also alleged their vendors are operating in the red.

"The mills are doing this to themselves. It’s incredibly insane," the Illinois distributor added.

The practice of signing short-term discount price agreements outside of fixed-price contract business has created two additional markets: a spot market featuring premium prices and a "shadow" spot market that resells excess tons bought at the discounted rate, sources added.

"I’m a service center getting CRU minus 5 percent at 3,000 tons a month with a mill. But I sold only 2,000 tons of the 3,000, so I have to mark it (1,000 tons) to market at zero profit. I’m getting annihilated," the Ohio distributor said.

The decision to stop the practice "was inevitable," a Michigan distributor said. "But if ArcelorMittal is the lone ranger, or if anyone follows, we don’t know. There are more questions than answers. This will take months to play out."

Sources seem eager to find out what ArcelorMittal’s peers will do and what new mechanism they might adopt to assess and set pricing going forward.

The Midwest processor agreed that producers will have to develop a replacement for the CRU-minus discount program for large-volume buyers. "There always has to be some form of incentive offered to a buyer for that buyer to agree to lock in purchasing. Otherwise there is no incentive."

Catherine Ngai, Jo Isenberg-O’Loughlin and Thorsten Schier, New York, contributed to this story.

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