***SPOTLIGHT: ArcelorMittal discussing changes to annual steel prices

ArcelorMittal is discussing changes it may make to sales contracts it agrees on an annual basis with several key industrial clients, director for commercial co-ordination and marketing Michael Pfitzner told MB

Industrial steel consumers may have to accept more flexible pricing

ArcelorMittal is discussing changes it may make to sales contracts it agrees on an annual basis with several key industrial clients, director for commercial co-ordination and marketing Michael Pfitzner told MB.

Any changes made will be a result of the quarterly, index-linked iron ore contracts that the world’s three largest iron ore miners agreed for deliveries made in 2010, abandoning the annual benchmark system.

“We need to find a way to adapt to the quarterly price changes,” Pfitzner told MB. “We have to revise our annual contract policy and we are on the way to discussing this with our customers.”

Leading steelmakers like ArcelorMittal sell a large portion of their European production to industrial customers in sectors such as automobile and white goods manufacturing, agreeing prices on an annual basis to minimise price volatility.

Having to pay iron ore prices that change on a quarterly basis will leave these steelmakers vulnerable to significant price risk, Pfitzner said.

“The iron ore price change from quarter to quarter has to be invoiced to the customer,” he said. “It’s clear that no one, including us, is happy about this.”

But most, if not all, of these steel consumers already purchase many of their materials on more flexible pricing terms — stainless steel, for example, which fluctuates on a monthly basis in line with alloy prices.

Therefore, a move towards more flexible terms for finished steel will not be a voyage into uncharted territory, he continued.

“Of course it is clear that the price part of our [annual] contracts has to change,” he said. “But prices will also change more regularly in both directions: they will go down as well.”

Nonetheless, the changes will come at a difficult time for ArcelorMittal, which is targeting an increase in European spot prices for the third quarter in line with an uptick in demand during the first and second quarters.

While the declining value of the euro against the US dollar has helped to keep imports out of Europe, it has also had a significant negative impact on ArcelorMittal’s businesses in Europe, which purchase their raw materials in dollars but sell their products locally in euros.

Along with higher raw materials prices, this has become a key determining factor in the company’s European pricing policy for the third quarter, Pfitzner said.

ArcelorMittal will increase its hot rolled coil base price to €650 ($807) per tonne for July deliveries in Europe, while deliveries of cold rolled coil and hot dip galv will be increased to €730 and €740 per tonne respectively.

This is €200-250 up on prices in the fourth quarter of last year.

“[This] is a direct result of cost increases in raw materials, mainly iron ore but also coking coal and scrap, and to some extent the exchange rate,” Pfitzner told MB. “We will revisit [the prices] in August and September, but we have not yet decided [if they will change].”

“We assume we’ll be going for another increase,” he said, explaining that currency fluctuations are still playing havoc with the steelmaker’s balance sheet.

“It depends on the exchange rate,” he continued. “We haven’t fully incorporated development of the euro against the dollar yet. This might force us to ask for corrections in the remainder of the third quarter.”

“Overall, we believe demand in quarter two and quarter three has been much better than originally anticipated,” he continued. “We believe quarter three will not be a weak one.”

The company has other problems as well, though.

As MB’s Top Steelmakers list will soon show, ArcelorMittal made dramatic reductions in its crude steel production when the economic crisis gripped the steel markets, and it made them quickly.

Some of the company’s brethren, it seems, were less responsible, and the world’s largest steelmaker has lost out in some areas as its competitors sought to grow their market share.

“We have lost market share during this crisis because of our quick action,” Pfitzner told MB. “We are working closely with our customers to get back to where we were before.”

“At the end of this year we expect our share of the world market outside of China to be the same as it was in 2007,” he said.