Although more than two months have gone by since it clearly emerged that all the major steel mills want to move away from the “CRU-minus” pricing system, a consensus between mills and consumers for next year’s contracts remains elusive. Catch up on the context of steel contracts and CRU-minus here.
Without much progress in the negotiations between steel mills and consumers, we’ve put together three distinct possibilities that could pan out in the coming months:
1. Fixed Pricing
Steel mills could go back to engaging on fixed price. Considering the unstable raw material price trend, the duration of such fixed pricing is expected to be short (i.e. quarterly or six-month fixed prices), unlike the yearlong contracts witnessed before 2010.
However, this will not be a win-win scenario. In case of demand not recovering significantly enough, the spot market prices will remain weak and much lower than the fixed contract price, thus adversely impacting steel customers.
Possibility of market adoption: Low to Medium
2. Index Pricing
Although the mills will eliminate the discount system, the market could still continue to adopt contract pricing based on popular price indices. Monthly or quarterly fixed prices linked to one of the popular indices (predominantly CRU) will be the most accurate reflection of the market conditions and hence acceptable to both the mills and consumers.
Possibility of market adoption: Medium to High
3. Raw Material Surcharge
Considering that raw material price volatility has always been cited as a reason for mills to increase their prices, a transparent surcharge component to steel price based on raw material price can be a considered model. At the moment, some steel contracts do have clauses to share the risk associated with raw material cost fluctuations.
The surcharge is set based on a raw material price index. A slab is set for changes in surcharge price and similar adjustment in the price is set based on this slab. The slab is arrived at based on the volumes purchased by the customer, the input cost for the steelmaker and the trends in raw material fluctuations. In practice, this system is adopted only in the case of large buyers guaranteeing a minimum volume of purchase.
Possibility of market adoption: Low
Up Next: What will the impact on consumers be?
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.