CHICAGO ArcelorMittal USA
LLCs announcement that it will cease selling hot-rolled
steel priced off a discount to CRU Groups 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 (
amm.com, 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 ArcelorMittals leading move to
cease discounting off CRU prices in flat-rolled contracts, a
number of market sources told AMM.
"I can tell you theyre 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 didnt
return AMMs calls, while AK Steel declined to
comment. CRU also couldnt provide comment April 17.
Most sources said the issue
isnt 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
AMMs published hot-rolled coil spot price of
$590 per ton f.o.b. Midwest mill.
"Its insanity to get 5
percent (below CRU), let alone 8 percent. Weve heard
numbers of a 10-percent discount; thats $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. Its incredibly insane," the Illinois
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
"Im 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. Im 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
dont know. There are more questions than answers. This
will take months to play out."
Sources seem eager to find out
what ArcelorMittals 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
Catherine Ngai, Jo
Isenberg-OLoughlin and Thorsten Schier, New York,
contributed to this story.