US sheet mills face drop in service center contract business

US sheet mills were stuck facing the prospect of lower service center contract business in 2022 as buyers balked at more stringent contract terms.

Proposed contract terms included cuts to discounts on index-linked deals, full prices for extras associated with grade and gauge of coils and reduced or eliminated freight equalization. Steelmakers propositioned contracts on the benefits of securing availability, rather than price.

The move was propelled by the nearly year-long steel shortage starting in Q4 2020 lasting almost to Q4 2021.

As the calendar moved into contract season in the final quarter of last year, more buyers were seeing an influx of supply from domestic mills catching up on late orders, import bookings showing up at ports and more aggressive offers out of Mexico and Canada.

It appears that many buyers who threatened to walk away or reduce contract positions in 2022 have done so, preferring to take their chances in the spot market.

One service center source said they had reduced their contract positions by about 40% in 2022 from last year with the domestic mills. The source said the mills approached negotiations too confident given the runaway market in 2021 but given the growing evidence at the end of the year that 2022 availability would be significantly improved it would be better to play the spot market.

A second service center in the Midwest cut its contract obligations from about 95% of buys in 2021 to approximately half in 2022. This equated to around 15,000-20,000 short tons a month less of contract obligations just for one business sector.

One Midwest mill source confirmed there had been cuts in contract positions from major players. The source reported hearing one large buyer cut its obligations to about 3,000 st a month from 30,000 st a month with a different mill.

Another service center source said he had walked away from all contract commitments with one major mill for 2022 as he did not agree with the proposed terms. The offered discounts kept prices too close to the spot market and there was no incentive to sign up, according to the source.

He said there was access to imports and other supply options and their only contract for 2022 was based on the startup of Steel Dynamics Inc.’s new Texas mill.

As buyers cut positions, SDI said during its recent earnings call it did not expect to see a major change in its contract levels through the first half of 2022. SDI said about 80-85% of its flat-rolled volume in Q4 2021 was based on lagging-contract business.

Theresa Wagler, the company’s CFO, said they expect their contract business to stay in that range through the first half until their new mill in Texas comes online, shifting the business mix.

“One must recognize that the spot hot-band market has diminished in size over recent years as contract business increased across the industry,” added CEO Mark Millett. He noted that spot sales were not necessarily reflective of the whole market given the growing importance of contracts.

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Tags: service center, prices, US, Market, sheet mills