We’ve looked at how plummeting ferrous scrap prices post-2008 impacted steel contracts, what CRU-minus was originally all about, and the possible scenarios of what steel mills may do with contract pricing next year.
So what will be the impact on consumers?
But first, the extent to which the steel mills will be successful in switching to the new pricing system will depend on the following:
- Steel mills remaining united and strong in their stand on the new pricing mechanisms
- Domestic mills exhibiting production discipline to draw down any surplus in the market
- The US Fed quantitative tapering not having a significant impact on steel demand
- Domestic demand showing healthy improvement in 2014
In short, the extent to which mills can be successful in the new pricing system will largely depend on steel demand remaining healthy along with prevention of any surplus in the market.
The level of impact on steel consumers due to the pricing shift by mills will vary greatly depending on the size of the consumer.
Mills are expected to offer volume-based rebates and margin-back offers for large consumers to smooth over the transition. A fixed rebate is expected to be offered above minimal guaranteed volumes.
Industry sources cite that the minimal volume could be around 1,000-1,500 metric tons a month, whereas the rebate range could be between US $10-20 per ton for such large volumes.
In spite of such sweeteners, a discount-less pricing system will ideally result in an overall increase in the base prices of steel. Hence, large consumers and service centers can actively consider the possibility of imports from East Asia to meet a portion of their requirements.
Unlike the US mills, East Asian mills (especially Chinese mills, considering the surplus in China) will be eager to provide long-term fixed pricing (six-month fixed pricing, etc.). However, threat of such consumers moving towards imports will result in domestic steel mills falling back on offering discounts if they lose their market share to cheaper imports.
Read the entire series by beginning with Part 1.
MetalMiner welcomes guest contributor Badri Narayanan, a lead analyst at Beroe Inc., specializes in tracking various steel markets and related alloys. Beroe is the premier global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. With nearly 400 dedicated procurement specialists in 38 domains, across 9 industries, Beroe proactively invests in knowledge assets to build valuable, real-time procurement insight.