NEW YORK As
negotiations laying the foundation for next years
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.
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" dealsusing a specific CRU
Group indexed price minus a certain percentagehas 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
"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
arent making money, and where the industry has gone
isnt fair. Were not going to subscribe to that
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 butsthe mills do not want to do CRU deals and
theyve 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 SAs Flat Carbon
Americas unit, said during a second-quarter earnings conference
call that because some of the companys 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 theyre gouging people on
paper, but the mills arent getting it. Theres no
opportunity for the mills to make up for bad contracts."
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 its only one
small guy who cracks, it wont 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 isnt going to happen
and are trying to go back to old-school (cost-based) business.
But doing cost-based analyses dont work because costs and
selling prices arent 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 Severstals 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 doesnt always mean the best price."
One option thats
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
"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. "Were looking into some sort of fixed
pricing, whether monthly or quarterly, but also at other
Other mills said that
tracking raw material input costs also could be a potential
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
theres 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 its 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
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 dont 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.
not be reached for comment. Nucor and CRU declined to