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US sheet contract talks off to slow start; mills, service centers at odds

Highlights

Mills looking to reduce, remove discounts on prices, extras, freight

Buyers not willing to commit to higher priced contracts

Uncertainty remains on how to reset some contracts

Mills to give some contract allocation back to spot market

US sheet steel contract discussions for 2022 have been slow to progress as mills look to hit the reset button on discounts and service centers aren't ready to commit to higher prices.

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"Everyone is looking at this as the market you clean things up," said one mill source. Some contracts were progressing in the typical index-linked fashion but there was little to no discount offered. The largest discount being discussed in the market was around 2%, but he said he couldn't confirm who had been offered that level.

Another mill source admitted they were slow to get contracts out to customers due to a lack of information. The mill's initial offers to customers were likely to have either no discount or up to 2% on index-linked agreements.

It is very "difficult to get deals down when mills are slow to offer quotes and service centers are reluctant to accept deals that represent increases year over year," said a third mill source. "Something will have to give soon since lead times are well into Q4. Most buyers acknowledge they will pay more in 2022 (base, extras, freight); the question is how much?"

Buyers remained apprehensive about committing to any 2022 deals given the reduced discounts on prices and removal of reduced extras and freight. One Midwest service center source said he had spoken to a major mini-mill supplier about a couple thousand tons per month contract for next year. They had indicated smaller 500 ton per month deals had been concluded at a flat index price with no discount. "No thank you," said the service center source.

Another service center source said he had an index-linked contract with around a 4.5% discount and half-off listed extras for 2021, now the mill was pushing for a discount of around 1% and full-priced extras. He was not thrilled with the initial offer and was willing to wait a little longer despite warnings from the mill that its availability was filling up.

Uncertainty in unprecedented times

As domestic prices remain near all-time highs and mill margins continue to expand both buyers and mills are grappling with uncertainty over how to construct contracts for 2022. It is clear prices will be higher for buyers compared to 2021 agreements, but it is an unprecedented market with more questions than answers heading into next year.

One buy-side source said some mills are claiming to not have a clear picture regarding contracts, a result of fixed price or raw material indexed contracts on the books this year. Those agreements for 2021 were some of the lowest priced but how do mills approach trying to reset those levels with such massive year-on-year changes in spot prices, asked the buyer.

He suspected mills will be more willing to reduce contract commitments in 2022 as they continue to internally have more downstream assets to supply and deal with the variance of monthly minimums and maximums in many contracts. "This creates a lot of uncertainty as to what contracts they want to cut and put more into the spot category," added the buy-side source.

A service center source said a mini-mill informed him that contract commitments will drop in 2022 to below 40% given an expected strong domestic spot market.

He noted he will keep importing and securing contract commitments with other suppliers in North America willing to provide larger index-linked discounts.