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Steel mills mull options as talks heat up

Keywords: Tags  steel, CRU minus, price discounts, ArcelorMittal, Severstal, Nucor, Tom Marchak AK Steel, steel contracts catherine ngai


NEW YORK — As negotiations laying the foundation for next year’s flat-rolled steel contracts kick off, the market is attempting to measure how committed U.S. mills are in their pledge to bring the practice of discounting off an index to a halt.

Contracts negotiated between U.S. mills and buyers on a fixed duration, tonnage range and price basis are commonplace. But in recent years the rise and spread of "CRU minus" deals—using a specific CRU Group indexed price minus a certain percentage—has led to a practice that mills claim is eroding sales margins.

As parties begin discussions over what shape contracts will take next year, the pressure is mounting to find some middle ground between buyers, who expect to receive an incentive if they sign a contract, and sellers, who have pledged against offering the same discounts.

"I understand where buyers are coming from, but the advantages have gotten way out of line and been abused," Thomas Marchak, vice president of commercial at Severstal North America LLC, told AMM. "There needs to be discipline across the board. The mills aren’t making money, and where the industry has gone isn’t fair. We’re not going to subscribe to that philosophy anymore."

ArcelorMittal USA LLC, Nucor Corp. and Severstal North America each informed customers in the spring that they would no longer enter into any new agreements based on a CRU discount (amm.com, April 18).

An AK Steel Corp. spokesman told AMM in an Aug. 20 e-mail that the company believes "agreements which contain negotiated base prices and features that incorporate raw materials and energy price adjusters make good sense in order to reflect changing conditions for steelmaking inputs" without referencing CRU.

But one hurdle, sources said, is that mills will have to be creative to appease large customers without surrendering ground, a maneuver which promises to prove daunting.

"The question is, are mills just going to walk away from business? There are no ifs, ands or buts—the mills do not want to do CRU deals and they’ve made it clear," said a source at a Midwest service center with a CRU deal.

Margin compression and price erosion have been concerns for U.S. steelmakers even as Wall Street expects the industry to record more robust profits, given the recent successful rounds of prices hikes.

Louis L. Schorsch, chief executive officer of ArcelorMittal SA’s Flat Carbon Americas unit, said during a second-quarter earnings conference call that because some of the company’s production is tied to indexed contracts, there are third-quarter deals being made off fairly low second-quarter prices, in effect blunting the full impact of the price hikes.

"Right now, the mills are really busy," said a source at a second Midwest service center with a CRU deal. "But how many people are paying the real numbers? It looks like they’re gouging people on paper, but the mills aren’t getting it. There’s no opportunity for the mills to make up for bad contracts."

As contract negotiations heat up, the key question is whether all producers will stick to their guns and refuse discounted-from-index pricing. If one producer opts to stick with "CRU minus" in exchange for increased market share, the pressure for others to do the same would build.

"If it’s only one small guy who cracks, it won’t matter. There would probably still be plenty of business. But if you get two or three rogues doing it, then you have real momentum," said a source at a Midwest service center without a CRU deal. "The mills have said that CRU discounting isn’t going to happen and are trying to go back to old-school (cost-based) business. But doing cost-based analyses don’t work because costs and selling prices aren’t always connected. If they were, mills like Bethlehem (Steel Corp.) would still be around."

Marchak agreed, noting that for the "system to work" every part of the supply chain would need to make money. He said that Severstal’s plan is to offer daily spot prices and a fixed monthly index price off Platts and also continue its "firm pricing option" for those who require longer-term fixed prices (amm.com, June 17).

"Hopefully, there are more intelligent people running companies these days. What I mean is that we need to look at this as a business and not a friendship," Marchak said. "Ford Motor Co. sells cars to make money and we need to sell steel to make money while also providing value to our customers. I think the industry needs to be responsible and offer options. At the end of the day, what every buyer is trying to accomplish, hopefully, is getting the best value, which doesn’t always mean the best price."

One option that’s been discussed, sources said, is discounting off published extras, which would effectively satisfy both incentive-seeking buyers and mills holding a hard stance on contract discounts. Others said that tightening volumes in future contracts would be important.

"There was a world that existed prior to ‘CRU minus’ contracts and there were pricing mechanisms that seemed to work fairly well," a mill source said. "We’re looking into some sort of fixed pricing, whether monthly or quarterly, but also at other options."

Other mills said that tracking raw material input costs also could be a potential option.

"Whether it’s CRU, or some sort of scrap, iron ore mix or even a mix of indices, there are a lot of ideas kicked around," a second mill source said. "There is nothing wrong with indices and there’s nothing wrong with contracts. The problem is how far it expanded. The mills got stupid, and besides having bucket programs (they) left volume ranges wide open. The min-to-max volumes have too big a swing."

Buyers are hesitant, though, because of the potential lack of transparency.

"I think a more realistic way to do this is to see a structure geared towards raw material costs and measures demand so that it’s more reflective of the (physical) market," said a source at a Southwest service center that previously had a CRU deal. "But how you do that will be tough because the process has got to be transparent."

Buyers urged that whatever approach ultimately emerges at the end of the day, the potential for both buyer and seller to make a profit is the most critical element. "I don’t care what I pay for steel, as long as I can turn it around and take that steel and make a return on it," a southern service center source said.

ArcelorMittal could not be reached for comment. Nucor and CRU declined to comment.


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Comments
  • JOHN SHAW
    Aug 23, 2013

    I do think it is interesting that AM, AK, and Severstal are the mills that pushed cost based pricing based on the CRU back when the input costs were out of control. It is tough to play both sides of the fence.


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