U.S. Steel will not enter into spot-market-based adjustable-price contracts in 2020, the company announced on Tuesday August 13, citing volatility in the North American flat-rolled steel market.
“The growth of adjustable-price contract mechanisms... [has created] volume uncertainty and disruption throughout the supply chain,” the Pittsburgh-headquartered integrated steelmaker argued, noting that price-adjustable contracts are driven by spot market transactions.
“Monthly negotiations used to be a staple in our business relationships, not to mention quarterly, semi-annual and annual fixed price agreements,” the steelmaker continued. “We are prepared to utilize any of these options while also satisfying the volume needs of our customers over a defined period.”
Some market participants voiced concerns about that change, however.
U.S. Steel's decision to drop price-adjustable contracts risks giving too much pricing power to mills - and may result in buyers booking orders with mills that continue to offer adjustable contracts, one Midwest service center source told Fastmarkets.
"People are searching for a new way to do business," he said of dissatisfaction with adjustable-price contracts.
"[But mills] need a number that is transparent," the Midwest service center source continued, noting that most buyers won’t trust mills to provide a fair price.
"I think this is a big risk for [U.S. Steel],” he said.
Past volatility, future uncertainty
Fastmarkets' daily hot-rolled coil index, fob mill US, was assessed at $30.29 per hundredweight ($605.80 per short ton) on Monday August 12. That price is up by 18.6% from a two-and-a-half-year low of $25.54 per cwt seen in late June, but is down by 33.9% from a roughly 10-year high of $45.84 per cwt seen in July 2018, after the Section 232 tariffs on steel imports were implemented.
Oversupply, flat to weak demand, and trade uncertainties were to blame for weak sheet prices in the first half of the year, according to sources. The index has recovered somewhat since domestic flat-rolled steel mills announced three rounds of $40-per-short-ton ($2-per-cwt) price increases in late June and early July, but similar announcements in January and February had little impact on the market.
When prices hit a bottom around the $25.50-per-cwt mark in June, integrated mills' margins were hurt more than mini-mills' were, because the latter can still turn a profit at prices as low as $23 per cwt, according to market participants.
U.S. Steel this month reported a sharp decline in second-quarter earnings, citing weak flat-rolled steel prices.
The company also recently idled two of its blast furnaces – one at its Great Lakes Works near Detroit and the other at its Gary Works near Chicago – due to “current market conditions.”
Company president and chief executive officer David Burritt said during a quarterly earnings conference call on August 2 that U.S. Steel will closely evaluate the market before making any decision to restart the idled furnaces.
Michael Cowden in Chicago contributed to this report.