Contract Negotiations Heating Up – Too Little Too Late?

Negotiations on 2014 flat rolled steel contracts are heating up. Sources are advising Steel Market Update that there has been some movement in the negotiation process by the domestic mills which has allowed a number of the mills to close some 2014 business. We are also hearing from multiple sources of a move by buyers to procure a higher percentage of tons either into the spot market or offshore (or both).

With lead times slipping into January (with ThyssenKrupp Steel USA now moving into February) one thing seems to be certain – the next few weeks are going to be critical for both the mills and the end users/service centers if they want to get contracts covered for 1st Quarter 2014.
 
First Quarter is Key
 
Service centers and end users are focused on covering their 1st Quarter 2014 needs. Most of the domestic mills (not all) took very aggressive stances to their negotiations on 2014 contracts. This was due to the desire on the mills part to eliminate discounted CRU deals (CRU “minus”) as well as “bucket” deals. As negotiations stretched into October, and now November, end users were left with no choice but to begin to cover their early 2014 needs.
 
“We have been able to make a little progress in the past week but have also padded with additional imports for Jan through April, and unfortunately for domestic sources since agreements could not be reached sooner our company has already committed orders for off shore material and we cannot un-ring the bell,” is what one end user told SMU earlier today. “We suspect others in the construction market probably have hedged their bets as well, let’s hope it doesn’t push market prices down in first quarter. It’s going to get real interesting if we have a hard cold winter.”
 
A second manufacturing company from a different industry group (not construction) told Steel Market Update that they had concluded their negotiations with three mill suppliers earlier this week:
 
“The mills remain adamant about not giving discounts, and not giving away anymore than in past years. I’ve negotiated Platt’s index contracts with both our major mini-mill and integrated steel suppliers this week. Our contracts only amount to around 16% of our steel volume, so they are not significant in the big picture. While they would not give any discounts, I was able to negotiate reductions to listed extras in the price book, or start the index based on a base price favorable to current spot prices. The end result being I got my discounts, but in another form. The rest of the volume I buy spot, and I’ve bought enough to carry me through Feb. on most items that will not be bought on the contracts. If deals develop before I need more steel in March, I may be able to take advantage of them. If not, then I’ll wish I done something different. I think we’ll have to wait until early Jan. to tell if the mills have enough Jan. orders on the books to keep the lines running without cutting prices to attract business.”
 
A third large manufacturing company confided in SMU regarding their negotiations. They told us they are taking 40 percent up to 60 percent of their total business into the spot and foreign markets for 2014. They were able to secure contracts from their main flat rolled steel supplier but are having issues with two other mills. Here is what they told us regarding the status of negotiations this week:
 
“We have been in contract meetings with [mill names removed], and frankly I don’t think anyone with any sense would agree to what they are offering. The price is set a month to two months ahead of rolling with very restrictive terms for any changes, cancellations, etc. All of this will push people to auction off large blocks of tons every month to the lowest bidder or to buy imports. It is what we plan to do. Accordingly, we should see a much more volatile market next year with US prices finally coming into line with the rest of the world.”
 
A manufacturing company associated with the construction markets explained to SMU how difficult it was to quote new projects in an environment where spot prices are rising and mills are limiting their contract negotiations:
 
“I am not seeing a lot of change although I think the starting offers are below the $ 40.50 HDG base that was announced last week. We are mostly concerned with first quarter and, currently, our customers are only interested in one quarter at a time. We do a lot of project based work and so our bigger concern is putting out a quote # that is both competitive and obtainable within the next 60 – 90 days. Try that in this environment. My opinion is that business will be more quarterly unless there is a significant event that changes the current balance of supply/demand. I am not sensing that there is concern about steel availability.”
 
Manufacturing companies are not alone in their quest to complete contract negotiations. Service centers are trying to at least cover their existing contract accounts through the 1st Quarter. One service center told us their customers were only concerned with one quarter at a time pricing.
 
One service center executive told SMU earlier today, “I am very nervous to get involved in a CRU deal that is very marginal. The numbers are higher than they should be so we will sit on our hands and wait.”
 
The same service center executive spoke to SMU about the amount of foreign steel which will be hitting the U.S. market in the near future. “The September and October numbers mean very little as the steel was bought back in May when the business environment was different. The peak for imports will come in December, January and February. It is hard to quantify exactly how much is coming.”
 
A large service center provided the status of contract negotiations from their vantage point when they provided SMU the following information:
 
“On the contract front, we’re hearing from multiple levels at multiple mills, that their Production departments internally had been raising concerns about the lack of contracts coming in for next year. As the mills moved more and more to contractually based business, they enjoyed regular inflow of predictable monthly orders. This in turn helped the mills to improve operating efficiencies, and thus led to lower costs to operate. It may be these reasons plus the calendar, which has led many mills to shift gears and start to close 2014 annual contracts in the last week or so. We’re seeing a few mills (TK and some smaller mills) moving forward with contracts utilizing the existing structure of Index less discount, with the average discount % being 2-4%. In addition, we’re seeing deals being done with a discounted starting price (relative to today’s price level). Pricing will then adjust monthly, $ for $, based on the change from the month before (1 month lag). The discounts on starting price are not as high as the %-off deals this year and prior, ranging from 2-3% from current index level.
 
From what I’m seeing/hearing directly and indirectly, all mills are on board with these recent developments mentioned above, with the exception of Nucor and USS, who are holding out. These 2 players are still refusing to do any discount (starting base, or %) to the index, and are sticking with a Volume Rebate as their sole incentive for contracts. There have been some movements by these 2 mills this week to increase the rebate levels, but they remain out of sync and uncompetitive to the rest of the field. They may find themselves with much fewer contracts if they continue to hold out much longer.
 
All in all, for the mills closing deals they at least been able to achieve their goal of reducing the discount levels of the recent past. Current market conditions (tight and prices rising) may have contributed heavily in their abilities to do so…”
 
From Steel Market Update vantage point it appears at least the first half 2014 may prove to be very volatile. After all, it is an even numbered year (2004, 2008, 2010…).