Two Different Views on Domestic Mill “Bucket Deals”

Somewhere along the line the idea of allowing flexible tonnage purchases on month to month tonnages originally pegged for spot purchases to go into “bucket deals” has been killing some of the smaller spot distributors and wholesalers.

The worst time is now – when the price cycle becomes one where prices move higher over an extended period of time.  This allows the special CRU minus bucket deals maximum penetration into the spot markets.

One of the most seriously impacted markets is the construction or HVAC markets where a small number of large service centers have begun to dominate the smaller distributors and wholesalers. One of those distributors sent SMU the following comments regarding the use of CRU minus “bucket deals” and their impact on the spot market:

“The bucket deal service centers have begun to cap the market momentum for mill increases, selling certain end users well below the announced spot mill replacement costs.  These bucket deals are not used as a tool to under-gird a strong value proposition.  They are used as a risk free weapon to exterminate their competition on price. The mills must realize they cannot give purchasing programs of mass destruction to pricing terrorists and expect a fertile spot market left to harvest.  The potential outcome is a new world order in which no index matters, because there aren’t any spot buyers left to report.  Start putting steel in the hands of people who can create market value with it.  Stop selling those whose strategy of power only creates a market wasteland.”

SMU has broached this subject in the past when speaking with HARDI related galvanized sheet and coil wholesalers.  They appear to be the most vocal group affected by the larger service centers that have targeted the HVAC industry as a place to grow their business through the use of the bucket programs offered by at least three mills.

Another Opion: Bucket Deals Rewards those who Fullfil their Monthly Buy Agreement

One of the larger service centers defended the CRU minus bucket deal programs with the following:

“If I understand your question on the “Buckets” properly, then I would say absolutely they have an impact. I’m not buying one pound of non-program spot tonnage, as I have mills which allow for increased tons on the existing program. Some mills allow me to buy more than the monthly agreement amount, while others do not. The mills that do, get all of my incremental, non-program spot tons.

While some see this practice as hurting the market, I have a different take: I would expect a mill that I make an annual monthly buy agreement with (and always fulfill), to treat me better when I want additional tons above the program amount, vs. a pure spot buyer, who comes and goes. I don’t see the difference of the mill giving me a 4-5% break off of the current spot (since I’m a loyal, regular customer), and using an existing CRU minus program, and allowing for additional tons in any given month. It works both ways: in down markets, the mill may ask for some additional volume, while in up markets, we may ask for more. Either side can say ‘No” at any time, but there’s a reciprocity principle at play. In fact, this is where relationships do matter in the mill / service center relationship. The one thing the mill appreciates more than anything is regular volume which can be counted on, in up or down markets.

At the end of the day, all of the transactions tie back to CRU, which is “the market”. Therefore, the discounts imbedded in the program, are what the mill is willing to give for a solid, regular buying customer. What’s wrong with that? If other buyers choose not to get close to mills and make commitments, and they want to buy primarily spot, how can they complain when the mills give their regular/loyal buyers a discount via increased “bucket”’ tons?

Having said all of this, the one legitimate complaint I’ve heard, is that there was not enough differentiation on the discount percentage, relative to volume. Meaning, the 4-5% discount off CRU appeared to be granted to smaller and smaller volumes over time, and the mills could and should have been more disciplined in stair-stepping the percentage.”

Contract Negotiations are Right Around the Corner

Back on April 28^th, Nucor advised their customers that they would “…no longer enter into any type of discounted index-based contracts, including ‘bucket’ contracts….”  Other mills have indicated similar sentiments but any new standards are not yet out in the marketplace that buyers can use as templates going forward.

We are quickly approaching the time within which the domestic mills will negotiate their 2014 contract deals.  When discussing the issue with a number of service centers they all say the domestic mills are waiting on some of the big guys (Nucor, AM, USS) to make the first move and actually eliminate bucket deals.  As one buyer told me this morning, “It’s like musical chairs. Once the big boys stop and get their seat then the rest of the mills will be able to negotiate from there.”