NEW YORK Just days after ArcelorMittal USA LLCs announcement that it would no longer accept new agreements based on a discounted CRU index price, a number of major domestic sheet mills have jumped on board in a commitment to halt erosion of already thin margins.
Dearborn, Mich.-based Severstal North America Inc. told customers in a letter dated April 17 that in addition to raising minimum prices to $32 per hundredweight ($640 per ton) for hot-rolled coil and $37 per cwt ($740 per ton) for cold-rolled and galvanized steel, it would no longer sell steel against a discounted CRU index price.
"Over the past few months, Severstal has been reviewing current pricing methods, including their effect on our customers," Tom Marchak, Severstals vice president of commercial, said in the letter. "We have found that discounts off a CRU indexed price do not always reflect market conditions."
While the company said its contracts for 2013 will be honored, it said it will "no longer consider agreements based on a discounted CRU price" going forward.
Charlotte, N.C.-based Nucor Corp. will also no longer enter into "any type of discounted index-based contracts," according to an April 18 letter to customers.
"Discounted index-based contracts have not demonstrated an equitable return for the commitments Nucor makes to (its) contract customers," Nucor said.
Nucor, which said it will honor its existing contracts, said that it will offer firm price/volume contracts up to six months in duration but said it will only consider index-based contracts without a discount when pricing off an index is required to meet competitive situations.
The moves by Severstal and Nucor follow ArcelorMittal USA LLCs leading announcement earlier this week that it would no longer enter into new agreements based on a discounted CRU following months of mounting frustration against the now commonplace discounts (amm.com, April 16). In January, the integrated steelmaker said that it was raising sheet prices, attributing the need to act to "market manipulation" and discounting off the index (amm.com, Jan. 23).
Other steelmakers seem to be on board as well, even if they havent released formal letters declaring as much. During an earnings call April 18, Mark Millett, president and chief executive officer of Steel Dynamics Inc., said that his company has been trying to resist discounting to CRU and that the industrywide move away from discounting is beneficial. "I think (for) the industry in general, its a very positive sign," he said.
But market participants said that for mills to move away from discounting off the index, strict discipline will be required, even as certain larger-tonnage and end-market consumers will likely put additional pressure on mills said to be hungry for orders.
"Theres still not enough strength, not in todays market," said one Midwest service center source. "The mills are saying: Were not going to do the 5 percent under CRU deal anymore, but were desperate for orders. I dont think this will work until capacity gets taken offline and there isnt a mill thats willing to fall under the sword right now to take down capacity."
Others agreed, noting that mills will have to look longer term and possibly take short-term losses to make this stick.
"Everyone in this business uses the index price minus a percent or two. Mills have tried to hold the line, but the question will be if theyre willing to (potentially) lose large pieces of business theyve had for many years by not extending any CRU deals," said one mill source. "Are mills going to enforce it now?"
Others added that ending discounting may also help boost margins, particularly as a number of market participants say that sheet hikes since the start of the year have effectively lost momentum.
"The bigger boys always had a minimum of 5 percent (discount) ... which is a huge chunk," said a second Midwest service center source. "If they only knocked off the discounts ... then mill margins wouldnt be hurt so much. They also wouldnt need to be messing around and looking foolish with more price increases."