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
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
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
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."