US Steel intends on moving away from spot market-based adjustable price contracts with its sheet steel customers in 2020, according to an internal letter issued Tuesday.
The steelmaker attributed some of the “volatile and unpredictable” North American flat-rolled market conditions to the increased usage of the adjustable price contract mechanisms.
“While the intent might have been to ensure a steady flow of contract volume across a contract period, the reverse has become the case, creating volume uncertainty and disruption throughout the supply chain,” the company said in the note to its sheet sales organization.
US Steel said the spot transactions driving the price-adjustable contracts constitute only a “minute fraction of the market” despite a significant portion of the market concluding business on the adjustable contracts.
US Steel sold 77% of its steel on a contract basis, according to the company’s second quarter earnings report. Within its contract sales 33% were firm prices while 39% were some sort of market-based adjusted price, either monthly, quarterly or semi-annually.
“We have ample price-supply options in which we will be more than happy to engage with our customers to meet their volume and price needs, just as was done mutually many years ago,” the company said.
“Transaction by transaction discussions and/or monthly negotiations used to be a staple in our business relationships, not to mention quarterly, semi-annual, and annual fixed price agreements, and we are prepared to utilize any of these options while also satisfying the volume needs of our customers over a defined period,” added the company.
A growing number of US flat-rolled steel market contacts had been discussing the possibility US Steel would notify customers about a change heading into 2020 contract discussions. The steelmaker was not the only major flat-rolled producer to be examining changing contract structures heading into next year, according to market sources.
In discussions with S&P Global Platts last week, market sources indicated some problems with the possible push to move away from using adjustable prices tied to the spot market. Both buy- and sell-side sources said a major shift away from current contract pricing mechanisms would have to be driven by buyers.
If customers prefer the adjustable price mechanisms and competing mills do not push for similar changes for 2020 negotiations the US Steel move away from them may be unsuccessful, according to market sources.