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Surcharge discontent said brewing with mills

Keywords: Tags  Nucor Corp., Gerdau Long Steel North America, raw material surcharge, shredded automotive scrap, rebar, merchant bars, structural products, Samuel Frizell

NEW YORK — Gerdau Long Steel North America’s move to set its steel prices before scrap settles for the second consecutive month appears to signal the market’s 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 AMM’s 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 settled—as well as before traditional pricing leader Nucor Corp.

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 (, May 3).

"I think they want to get away from it," said a rebar buyer. "At the end of the day, it’s demand that’s 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 going down.

"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 mechanism altogether.

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 also essential."

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.

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