Quarterly iron ore prices have been on European steelmakers’ minds for a while.
Germany’s ThyssenKrupp is the first producer to reveal its planned response. Unveiled last week, it didn’t come as much of a surprise. ThyssenKrupp Steel Europe will introduce a raw materials surcharge on its annual steel contracts.
The charge will be calculated using an as yet unspecified index or indices, and will supplement base prices that are negotiated once a year.
“For annual contracts, we will switch to so-called commodities-based indices,” a spokesman for the company told MB.
“The prices will consist of a base price and a variable surcharge that is driven by the development of raw materials prices,” he explained.
As MB went to press, Thyssen was the only European steelmaker to have clarified its position on long-term steel pricing.
The others will follow quickly.
ArcelorMittal is considering a similar solution and may also try to shift some of its customers onto shorter-term contracts.
In May the company told MB it was discussing the changes it might make to its annual sales contracts with several key industrial clients.
These talks aren’t over yet, but ArcelorMittal’s proposed solution will most likely bear a strong resemblance to Thyssen’s. “We need to find a way to adapt to the quarterly price changes,” director for commercial coordination and marketing Michael Pfitzner told MB at the time.
“We have to revise our annual contract policy and we are on the way to discussing this with our customers,” he said. “The iron ore price change from quarter to quarter has to be invoiced to the customer.”
Salzgitter has been conducting similar talks and Tata Steel’s European subsidiary, Corus, recently told MB it would seek quarterly steel prices from customers more used to settling annually.
This would be a direct result of this year’s iron ore settlements, the company said.
Producers are moving away from offering fixed prices. The reasoning behind this shift is simple — more flexible iron ore pricing terms leave steelmakers carrying more risk.
This is risk they’re not prepared to wear, so they plan to pass it on.
“All steelmakers are being forced down the route of more volatile pricing arrangements on the supply side and have got very little choice but to pass it on,” one market source said.
“The most solid opinion is to avoid six-month and yearly contracts in future and to negotiate on quarterly base [prices] with automotive and home appliance [markets],” another market participant said.
This won’t make steelmakers very popular with European manufacturers. With consumer spending at a fraction of its pre-crisis levels, many are already uncomfortable.
In many segments, manufacturers are being forced to compete with products imported from other markets where costs are lower. Having to deal with much more volatile materials prices will leave them in an excruciating position.
“It is clear that no one, including us, is happy about this,” Pfitzner told MB back in May.
Happy or not, steelmakers have a duty of care in ensuring that the transition to a new steel pricing system for their leading customers is handled well. Consumers aren’t likely to tolerate extreme volatility in the price of manufactured goods — brand loyalty only goes so far, particularly in today’s difficult economic climate.
There hasn’t been much outcry yet — many automakers, white goods manufacturers and OEMs are still buying material on contract terms agreed last year. Next year will be the test.
Late last week, a spokesman for ThyssenKrupp told MB that the introduction of a surcharge “has not been finalised”.
Whatever the company proposes will be controversial. Thyssen, like all European steelmakers, will have to work extremely closely with its most important customers to make sure it is accepted.