NEW YORK Gerdau Long
Steel North Americas move to set its steel prices before
scrap settles for the second consecutive month appears to
signal the markets growing discontent with the raw
material surcharge mechanism, steel sources say.
In previous months, many steel
mills announced their new steel prices in the days following
the release of AMMs monthly consumer buying
prices for scrap in the Chicago market, used as the basis for
some mills raw material surcharges. In May and June,
however, Gerdau sent out pricing letters before scrap
settledas well as before traditional pricing leader Nucor
Gerdau did not give a reason for
the timeline shift in the letters it sent customers, and a
spokeswoman for the company declined to comment further when
contacted by AMM.
But a number of participants in
the market said it appeared Gerdau announced its prices first
again this month in order to help initiate a move away from
using raw material surcharges (
amm.com, May 3).
"I think they want to get away
from it," said a rebar buyer. "At the end of the day, its
demand thats the biggest factor, not one raw material
that determines prices."
A mill source agreed, citing
growing discontent with the mechanism.
"We want to see a fair and
equitable price based on the dynamics of supply and demand
rather than the artificially driven raw material surcharge
price," he said.
Nucor also announced steel
prices before scrap prices settled last month. Nucor had not
yet announced its new published steel prices as of the
afternoon on June 5, but sources said they expected to see
letters from the Charlotte, N.C.-based steelmaker before the
end of the week.
One criticism leveled at the raw
material surcharge mechanism is that steel buyers sometimes
load up on orders if scrap prices appear to be going up and
stay out of the market if signals suggest scrap prices are
"If scrap is pointing up, it
does almost force people to get into the market before the
announcement," said a source from a second mill. "Everybody
spends half the month doing business and half the month waiting
for the next announcement to come out."
Several market sources have
indicated to AMM that a number of mills are discussing
whether it would be possible to drop the raw material surcharge
Sources said the scrap surcharge
was introduced in 2004 by the mills as a means to quantify and
communicate with customers the impact of monthly fluctuations
in scrap costs on finished steel prices.
"There was a monstrous move of
scrap in 04. Scrap went up almost $20 (per gross ton) in
January and almost $50 in February and then another $25 in
March," Charles Bradford, president of Bradford Research Inc.,
told AMM. "So (the mills) had to find some way to
include scrap price increases in their contract business. ...
It was a perfectly dumb idea in the first place, but it was
But several sources said the
mechanism is no longer a good fit.
"In the early run of the
mechanism, the raw material surcharge was useful, but it has
outlived its life," the first mill source said.