Final Thoughts

It is important for the industry to understand that it was not the credibility of the numbers being provided by CRU (or any other index for that matter) that prompted this move. At least that is not what we were hearing from steel buyers who were privy to conversations with U.S. Steel regarding their concerns. I spoke with a few steel mills today about the U.S. Steel move. Some were supportive of the concept. One mill didn’t care for the quarterly lag deals as the buyers are able to “game the system” as they have enough knowledge as to where prices will be reset with enough time to adjust the existing quarter’s orders. However, on a month-to-month basis, they felt the CRU adjustments were fair and indicative of market movements.

We asked Dave Feldstein, who writes articles about the futures markets, to weigh in on what he thought this might mean to those who are indexing, contracting or hedging futures. Here is some of what he had to say:

“They are trying to change the status quo and change it abruptly. There is a cost to do that. After all the chaos seen in 2018, I expect the buying community is not in the mood for more changes, and this kind of change needs both customers wanting this mechanism instead of the status quo and a reasonable level of trust. Considering the price movement in the first half of 2018, I don’t think that level of trust is very high. In fact, I would guess it is at very low historical levels relatively speaking…”

He continued with, “I think if there are customers that prefer this mechanism over the index price/status quo (i.e. customers have been requesting this from USS/MT). Then it would be better if these two mills offered the new mechanism as an additional choice, one where customers could choose to enter into contracts with the index or with this new mechanism, rather than trying to force it on them.

“As I have written all year, I think there is a ‘turf war’ amongst domestic mills and the battleground is in the Midwest. EAF mills probably prefer the higher variability of the index pricing due to their scrap procurement practices, while the integrated mills obviously prefer this new proposal or at the least are unhappy with the status quo. So, I don’t think the minimills will follow. AK is left with the choice to follow this proposal, risk losing business to the minimills as a result, or instead sticking with the status quo and focusing on taking the orders from Arcelor and USS for those customers needing tons only produced by an integrated mill (and can be produced by AK), but prefer the index pricing….” [SMU note: Feldstein mentioned in his opening comments not referenced above that he was aware of a rumor of ArcelorMittal USA following the no-index contract posture].

A large service center group that participates in hedging, spot buying and contracts in all fashions also gave me some insights into their thinking this evening. I asked the head of purchasing if the USS move was good for their business? “We buy both contract and spot from the market today and are comfortable doing either. Each have their advantages and disadvantages. Given all the added capacity coming into play, transitioning to less program and more transactional agreements will likely be more advantageous for the consumer.”

I then asked if the move was good for the industry as a whole? “This should be good for the industry. Justification for the change is, indexed contracts are ‘driven by spot market transactions which are only a minute fraction of the total market.’ Moving more volume to these transactions will give the market more data points to produce better indexes with more transparency.”

What impact will it have on hedging? “Hedging off a program tied to an index reduces basis risk (a plus). It also reduces your optionality with committed volume (a minus). If you switch to hedging off spot transactions, it can increase your basis risk (a minus) but it will increase your optionality (a plus). In a supply-rich environment, the added optionality will trump any additional basis risk. So, the overall net impact will be positive to those that use hedging because you will have more optionality and a more robust index to price off.”

Will other mills follow the U.S. Steel lead? “One of my colleagues compared this to a few years back when the mills tried to eliminate the program discounting that takes place in the market. They all tried, and we know how that played out. However, I’m not sure I fully agree with him. Mills can announce whatever they desire, but economics will set the rules of the game in 2020. If both the supplier and consumer deem this is beneficial, it will happen. Be careful what you wish for because you just might get it!”

As I said above, the timing of the 2019 SMU Steel Summit Conference could not be better. We will deal with this issue from a number of vantage points: CRU, steel mill, service center, financial institutions and from hedging viewpoints. You can still register for the conference by clicking on this link or going to our website: www.SteelMarketUpdate.com/events/steel-summit

Hotel rooms – all of the Gateway and the Atlanta Airport Marriott hotels are booked with the exception of the Westin Atlanta Airport, which is across the street from the Atlanta Airport Marriott. We will be running a shuttle from both hotels to the convention center. I believe there are 30 rooms left at the Westin. If you need help: Events@SteelMarketUpdate.com

If you are having any issues, please contact Paige Mayhair at 724-720-1012 or send an email to Events@SteelMarketUpdate.com

Our October Steel 101 workshop has just a few spots left open. For more information, go to www.SteelMarketUpdate.com/events/steel101

As always, your business is truly appreciated by all of us here at Steel Market Update.

John Packard, President & CEO