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US sheet mills looking to tighten 2021 contract deals, talks ongoing

Highlights

Mills pushing for more favorable contract positions

Looking to limit tonnage, price volatility

Annual negotiations still ongoing

Pittsburgh — US sheet mills are attempting to take a stricter stance on 2021 contract structures in an effort to improve performance following extremely low discounted prices in 2020. It is too early to tell how successful mills could be at shifting from the status quo, according to market sources.

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They said mills have been looking at at least one or a combination of three major changes to new contracts:

Limiting monthly variances for tons

The first major change being discussed is limiting or removing variance in monthly contract tonnages. A general rule of thumb has been that buyers were able to buy at 10% above or below a contract's stated monthly tonnage, in some cases as much as 20%.

The variance was designed to provide flexibility for buyers based on changing customer demand. However, many mills have lamented the swings in monthly tonnages as buying patterns shift based on pricing direction.

When spot prices are moving higher, buyers are more inclined to purchase the maximum allowed tonnage on contracts, giving them the lagging monthly discounted price. On the other hand, buyers will only purchases minimum monthly contract tonnages when spot prices are falling. The 10-20% variance in either direction can lead to 20-40% swings in a mill's monthly contract tons.

Multiple buy-side sources have confirmed that Nucor is leading the most aggressive charge to remove the variance from monthly contract volumes. The Charlotte-based steelmaker has been pushing for no built-in cushion for agreed-upon monthly tonnages. If a buyer was to enter into a contract, it would agree to a discrete tonnage amount and be obligated to take those orders.

The company could not be reached for comment.

It was unclear how successful the steelmaker would be as buyers have appeared less than receptive to the idea during initial negotiations, especially as other mills still appeared to be accepting the variability in their monthly contracts, sources said.

More robust price calculation

The second major change under discussion has been a shift from using a single index-linked data point to set monthly contract prices. Mills have been looking at minimizing the variability of monthly pricing by expanding the data set used to calculate contract prices.

A Midwest service center source said a mill had proposed the idea of a three-month rolling average to calculate the monthly contract price. He was uncertain about the exact details of the calculation as the mill had not yet provided him with a formal offer.

The service center source assumed the prior three-month average would set the following month's contract prices. So contract prices for January production would be based on the October-December average price.

A Midwest mini-mill source said they were "slow-walking" a lot of negotiations with buyers as they look to break from the status quo. The company was examining the different indices available in the market and while there has been no decision, he noted the mechanism to calculate the monthly contract price would be changing.

Moves to percentage instead of fixed dollar discounts

Mills were also looking to push a third change in the way the contract discounts are applied. In 2020 contracts, most buyers had a fixed dollar amount for their monthly discounts. The discount for hot-rolled coil was typically $40/st but in some case more and other cases less.

Mills now appear to be attempting to push buyers back into a percentage-based price discount system for contracts. Negotiations appear to be in the 4%-6% range for hot-rolled coil contracts, multiple market sources said.

For cold-rolled coil and hot-dip galvanized, one end-user said his discount offers were in the double digits. The source's annual contracts were negotiated in the third quarter at the trough of steel prices, while most buyers were negotiating annual contracts in Q4.

This proposed change was spurred by extremely low spot prices in 2020 coupled with fixed dollar discounts that pushed effective contract prices for HRC down to the low $400s and even lower over a multiple-month period.

Using the year-to-date Platts TSI US HRC index, a fixed $40 discount was a 7.6% average discount to spot prices for 2020, peaking at 9.1% in early August when spot prices bottomed at $439.25/st.

Based on the current US HRC price of $653/st a 4-6% discount would equate to approximately $25-$40 on a dollars per ton basis.

Break from status quo in 2021?

Mills pushing for improved contract terms is a normal launch to annual negotiations which begin in earnest following the US Labor Day Holiday in September. It remains to be seen what changes will be made to 2021 contracts versus prior years, sources said.

Buyers are in the process of negotiating contracts in one of the tightest steel markets in more than 15 years. The average mill lead time for HRC deliveries is beyond eight weeks, according to S&P Global Platts data, and buyers have been noting concerns about being caught steel-short.

Negotiations could drag out through year-end with buyers apprehensive about locking into mill terms when prices have surged almost 49% in just over two months on the back of temporary mill maintenance outages and lean service center inventories.