CONTRACT
BUYERS ARE NOT THE KEY DRIVER FOR STEEL PRICES ANYMORE
Buying just four times a year, as do many
major steel mill customers, can be extremely beneficial to consumers
when the market is trending upwards. In contrast, it can be
detrimental in the downturn.
This extra information is in response to
clients' requests to understand more fully the implication of steel
price movements as they apply to major steel mill customers who
purchase, normally, on a quarterly basis. Buying just four times a
year can be extremely beneficial to consumers when the market is
trending upwards. In contrast, it can be detrimental in the
downturn.
Due to their substantial steel requirements, large OEM's are
required to negotiate early with the steel makers to agree
production schedules. Deals are usually made two months prior to the
start of the delivery trimester. This gave an advantage to contract
purchasers of cold rolled through 2004 because, at the time of
agreements, the mills had available capacity. In 2005, these
contract buyers had completed their negotiations before the steel
makers' order book shortfall had become apparent and subsequently
discounts were given at a later date to the smaller purchasers.
With up to 50 percent of the steel
producers' total sales of cold rolled coil sold to major contract
customers, it is clear that the price agreed is important to both
parties. However, contract buyers are not the key drivers in market
price trends. The OEM's have reasonably stable requirements. They
keep small inventories. Moreover, they usually buy from local
suppliers to avoid irregular delivery patterns.
It is usually the mid sized/smaller buyers
and service centres that determine market price movements. They
carry large inventories compared to total usage. For this reason
they are able to purchase some of their needs from foreign sources -
often at competitive rates because delivery is less critical. This
category of buyer has more flexibility and can influence prices by
cutting off orders or placing extra requirements based on internal
demands or external leverage.
Large contract buyers are fast losing
influence in the steel market price scene. The days are long gone
when OEM's could demand substantial discounts because of the volume
of business placed. Contract prices now follow the market. They do
not lead it. Even the powerful automotive segments' annual contracts
are negotiated on the basis of the general market price tendencies.
In Europe, the mills are cutting output to prop up prices. This is
not the result of significantly lower order volumes from the large
contract buyers. The mills are reacting to the regular monthly
customers' demands and these are based on inventory levels and the
availability of imports.
As prices continue to drift in the EU
through the Summer, large contract customers will see their
purchasing power increase somewhat. However, if values continue to
slide over time, early agreements will result in them paying more
for steel over the full quarter, compared to a more flexible buyer
who goes into the market on a more regular basis. It should be said
that they had some of the benefit in the last upturn. But informing
the mill of the blessing of placing substantial orders when it is
overwhelmed with enquiries does not promote competitive offers.
It is clear that the steel stockists and
mid sized regular steel buyers have the greatest influence on the
market. Large contract buyers are eventually required to follow the
pattern already set by others.
MEPS prices reflect those agreed by
stockists and a great number of mid sized buyers on a monthly basis.
The large OEM's cannot stay aloof from their smaller counterparts.
The power is in the hands of the purchasing majority.
