Cost of Steel Creates Big Problems for Corus

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Ferrous Metals

Last week, I had a chance to get to know Geraint John, Editor-in-chief of CPO Agenda a little better when he came over from the UK to attend a conference here in Chicago. For those of you not familiar with CPO Agenda, the magazine covers a full range of strategic sourcing and supply chain management issues, told from a global view. Though not specifically geared toward the metals industry, Geraint tipped me off to a couple of interesting (and perhaps ironic) stories about steel producer Corus.

According to this article from Sky News, Corus may need to close its Teesside plant which produces thick slabs used to make steel girders and sections because its largest customer, a consortium that has bought 78% of the plant’s capacity for ten years back in 2004 has canceled its contract. Members of the consortium include Marcegaglia, SpA, Dongkuk Steel, and Duferco. The contract established a purchase price for the slab of $500/ton but the market price currently runs from $300-400/ton, depending on the specific grade required. We have seen companies reach these impasses many times before. And all of the stakeholders each make their case.

The UK government has encouraged Corus (and the Tatas, owners of Corus) to not do any layoffs.   They’ve even gone so far as to tell Corus to operate the plant at a loss. But the consortium faces a lack of demand and they too will operate at a loss if they buy the slabs at the agreed-upon contract price according to the same article. Business Secretary Lord Mandelson prefers to push the consortium hard to uphold its contractual obligations.

The irony, though, relates to what Geraint John reported in this article back on April 30 involving the cancellation of contracts on Corus’ raw material purchasing side. According to CPO Agenda,   A 50 per cent fall in demand for its products and a plunge in the price of steel from a peak of $1,200 a tonne to $390 meant the company was in survival mode. The company’s procurement spend would drop from from £7.5 billion in 2008 to around £4.9 billion this year. But here is the catch and the irony, according to Kees Gerretse, CPO of Corus, because of the company’s cash situation, his function had no choice other than simply to cancel contracts. He went on to say, that if his customers took him to court, fine, but [it means] we pay next year, he said.

Enforcing contracts on the sales side while violating them on the supplier side seems like somewhat of an awkward strategy. It looks like this plant may need some bail-out dollars.

–Lisa Reisman

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