NEW YORK Some domestic steel mills may be considering moving away from using scrap-based raw material surcharges as a component in their finished steel pricing as recent volatility in scrap prices erodes suppliers pricing power, sources familiar with the situation said.
No mills have officially announced an intention to stop using raw material surcharges in their net long steel transaction prices, but according to a number of market players, some steelmakers have been having preliminary internal discussions about whether its time to re-evaluate their pricing structures in light of significant scrap fluctuations in recent months.
Traditionally, many steel mills announce changes to their net transaction pricesoften comprising a base price and a raw material surchargein the days following the release of AMMs monthly consumer buying prices for a number of scrap grades in the Chicago market, used as the basis for some mills surcharges.
This month, however, major long steel producers Nucor Corp. and Gerdau Long Steel North America separately lowered their base prices on concrete reinforcing steel bar, merchant bar and steel beams by $20 per ton before scrap prices settled for May, a move that one source called "curious."
Gerdau, which led the move with a May 1 letter to customers, said its price drop was effective with all shipments beginning May 1 (amm.com, May 1), while Nucor said in a letter dated May 2 that its price drop was effective May 2 (amm.com, May 2). Chicago scrap didnt settle down by between $20 and $22 depending on grade until May 3, although early trading had suggested such a move was likely in the works (amm.com, May 2).
Nucor said in its letter to customers that it would not shift its prices again in May due to scrap price changes. "(This price change) will serve to be our new transaction pricing for the month regardless of any change in the raw material surcharge, which will be announced no later than the third Monday of the month," Charlotte, N.C.-based Nucor said.
Gerdau did not mention raw material prices at all in its letter to customers, noting that "increasing levels of competition from both domestic and foreign producers" triggered the move.
Nucor and Gerdau both declined to comment on the move, although one well-placed source noted that the drop was more an attempt to remain competitive rather than a deliberate move away from the surcharge structure.
But sources in the market said the preemptive price drop may suggest some producers are seeking to move net prices independently of scrap tags.
Some mill sources have expressed to AMM a level of dissatisfaction with the scrap surcharges, saying that the surcharges increase market volatility and discount important market factors, like demand and import competition.
A drop in scrap prices brings down mills selling prices, which in turn devalues their customers inventories. If the market anticipates a drop in scrap prices, buyers are less likely to hold inventoryand less likely to buy at all if they think prices could have further to fall.
"If weve got falling scrap prices, that puts everyone on the defensive and no one wants to place an order," one mill source told AMM. "If theyve got work, theyre taking material, but if they dont have work, theyre not interested in putting (steel) in inventory."
Rising scrap prices can have the opposite effect, sources conceded, but volatility in general is often more a hindrance than a blessing, they said.
Mills could have greater control of their pricing if they moved away from surcharges, a number of analysts told AMM.
"Its logical that the mills would not want their customers to ask them for a $20 price drop every time scrap falls," John Tumazos, senior analyst and owner of Very Independent Research, told AMM. "If Nucor anticipates systematically lower scrap or steel ingredient prices, they probably dont want to have a formulaic price reduction every month."