SBQ contracts reflect interim spot market gains; deal terms shifting: sources
Year-on-year increases in contract base prices for special bar quality (SBQ) steel products put 2023 deal levels on par with spot prices seen early this month, market participants told Fastmarkets, noting that some buyers also negotiated shorter contract terms on fears of a price drop late next year
Many buyers and sellers of special bar quality (SBQ) steel products have agreed to 2023 annual contracts that raise FOB mill base prices by $60-70 per short ton ($3.00-3.50 per hundredweight) above base prices seen in January, market participants have told Fastmarkets.
Due to spot market base price increases of $60-70 per ton that have occurred over the past calendar year, however, the new SBQ contracts for these buyers may reflect no net increase compared with spot market prices seen early this month, sources said.
“This amounts to no change on base pricing. Everything is flat,” a southern distributor said.
Specific contract terms varied, with some of the FOB mill base price increases coming in above the $60- to $70-per-ton range and some below, sources said.
For hot-rolled SBQ products, many annual contracts incorporate a price increase of $60 per ton above the base prices set for 2022 annual contracts, according to sources. For cold-finish SBQ products, market participants reported that new contracts put 2023 prices $70 per ton above 2022 contract levels.
In addition to the price changes, many contract start and end dates have moved forward compared with last year. This year, more contract start dates are set at December 1, 2022, or January 1, 2023, sources said; in contrast, many contracts last year began between November 1 and December 1, 2021.
Notably, for some, last year’s contract began before domestic SBQ mills announced $60- to $70-per-cwt base price increases in late 2021.
In October 2021, steelmakers including Republic Steel, Steel Dynamics Inc, Gerdau Long Steel North America, Nelson Steel and Nucor, among others, announced SBQ base price increases of $60-70 per ton.
Republic Steel again announced a $60- to $70-per-cwt hike in January; TimkenSteel, Gerdau and Nucor set similar hikes in February.
Those increases brought the total spot market gains since late 2021 to $120-140 per cwt; as a result, for those mills with earlier contract start dates, an increase of $120-140 per cwt over last year’s contract base prices represents no change from current spot market prices.
Fastmarkets’ monthly assessment for steel bar hot-rolled special bar quality (SBQ) 1-inch round 1000 series (carbon), fob mill US was $60 per cwt ($1,200 per ton) on November 18, down 2.44% from $61.50 per cwt on October 21.
Fastmarkets’ monthly assessment for steel bar cold-finished 1-inch round 1018 (carbon), fob mill US was $81.50 per cwt ($1,630 per ton) on November 18, down 1.81% from $83 per cwt on October 21.
Fastmarkets monthly SBQ prices will next be assessed on Friday December 16.
This year’s negotiations kicked off on September 23, when Gerdau Special Steel North America said it would increase base prices for all SBQ contracts for 2023 by a minimum of $280 per ton.
One source suggested that, even after that hike, Gerdau’s base price may not be higher than prices offered by other producers, indicating that Gerdau started from a lower base price in prior contracts.
“They may be catching up,” that source said.
The southern distributor offered a similar view of how Gerdau prices will compare to other producers’ after the hike, saying: “They typically stay below market a bit for heavy buyers.”
When asked about the size of its price increase, a Gerdau spokesperson stated: “While we don’t disclose the specifics of our pricing strategy, we continue to monitor the market to ensure that our offerings are competitively priced. That approach is reflected in the pricing announcement we issued in September for contractual business.”
A northern distributor expressed disappointment about the high numbers some mills had sought in price negotiations this year, indicating that additional conversation was acquired before eventually reaching “common ground.”
Despite worries that higher interest rates will push the economy back into recession at some point in 2023, sources mostly agreed that mills have demonstrated bargaining strength.
“The hot-rolled mills are still busy enough. They are able to stand firm on their pricing,” an eastern distributor said.
Not surprisingly, contract arrangements can vary widely in both price adjustment amounts and other terms, such as the length of the contract; at the same time, nearly all contracts provide for monthly adjustments in scrap and alloy surcharges.
For example, the eastern distributor said that he had long-term contracts “negotiated many, many years ago.”
“We have contract pricing for a discount off mill list prices that changes [monthly] depending on the surcharge and if there is an increase or decrease in base cost,” the eastern distributor said.
On the other hand, some buyers this year succeeded in getting producers to shorten their contracts from a year to six months, according to sources. Some buyers reportedly were reluctant to sign on for a full year at a price equal to or higher than the previous contract level, citing concerns that spot prices might fall in the second half of next year.
A hot-rolled mill source said that his company had successfully raised base prices in new contracts $80 per ton above last year. However, the prior year’s contract began in late 2021, before the first of two $60-per-ton price increases.
Thus, the mill’s $80-per-ton price increase in new contracts did not capture all of the $120-per-ton gains in the spot market since the last contract took effect. On the other hand, the contracts renewed for a full year, not six months, protecting the mill from potential lower spot market levels for base prices in the second half of 2023.
A cold-finish mill source offered a different take on the contract market .
“We don’t have a lot of contract business,” that source said. “We update prices either quarterly or semi-annually, [while other larger cold-finish mills] lock in pricing annually.”
In the end, a lot more buyers have likely opted to avoid annual contracts for 2023, the southern distributor said.
The eastern distributor was upbeat about 2023, saying: ”The new year should be a kind of normal year, as opposed to the craziness we saw the first part of this past year.”
“The big markets should be strong next year, with strong demand from oil and gas, construction and agricultural equipment,” a second cold-finish mill source said. “Consumer demand for light construction equipment may be down.”
Automotive is likely to be strong next year, as well as oil and gas, a midwestern source agreed.
“Everything else is a big question mark and makes people hesitant to do annual contracts. People in the general industry are more cautious,” the midwestern source said.The hot-rolled mill source also said his company was booking fewer orders in order to be able to shorten lead times for shipments, indicating that in recent months, “people put in place holders on allocations” to be sure they would be able to obtain future supply in a tighter market.
In response to falling scrap prices, “people have not been taking their steel,” the hot-rolled mill source said.
Similar trends have been seen in the cold-finish SBQ market, according to the hot-rolled mill source.
“Cold-drawers have taken our bars and they are sitting there waiting for customers to place orders. There’s nowhere left to stock them,” the hot-rolled mill source said.
Contract negotiations for 2023 had mostly ended by Tuesday December 13, when Nucor announced a base price hike of $50 per ton that was slated to go into effect January 1, 2023.
If the market accepts the latest round of price hikes, it will lead more customers to place orders for existing stock at cold-finish mills and lead to more orders from hot-rolled mills, market participants said.
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