When It Comes to Mill Price Increases,
Service Center Support's a 'Sticking' Point
By John Packard
As a service center salesman from the late 1970s to the early 1990s, it was my job to keep my flat-rolled steel customers informed about the market, especially when it came to mill price announcements. In those days it was heresy for a service center not to support a mill price increase. Granted, the price announcements tended to be in the $5 to $20 per ton range, not the $40 to $50 increments the industry has seen since 2004.
By the late 1990s and into the early 2000s, the domestic steel industry suffered from oversupply, a flood of imports and perhaps a lack of understanding of the service center’s role as an extension of the mill’s salesforce. During that period, distributors perfected the art of taking advantage of their mill suppliers. The days of price hikes “sticking” as soon as they were announced no longer applied. Many service centers took the prices they were able to garner from their struggling suppliers and went to market in an attempt to discount their way to increased market share, often relying on a price as the sole way of winning and keeping new business.
Steel Market Update has been tracking flat-rolled steel pricing since 2008, including the ability of service centers to go to their end markets and collect higher prices. By polling a large group of manufacturing companies, as well as service centers, SMU has been able to measure and quantify whether service centers as a group were raising, lowering or maintaining spot price levels. SMU’s research reveals a high correlation between service centers’ support—their willingness to raise and maintain higher prices after a mill announcement—and the ability of the domestic steel mills to collect some or all of their desired increases. The evidence shows that the mills cannot expect their price increases to survive unless they have the active support of a majority of the nation’s service centers.
Most recently, increases announced in early fourth-quarter 2012 were initially supported by distributors, and flat-rolled prices rose in November. Service center support began to wane in early January and then declined steadily until the next round of mill announcements in late May and mid-June. As expected, none of the increases announced in first-quarter 2013 “stuck” for at least four weeks.
Whether approximately $90 per ton of price increases announced during May and June are collected and the market prices continue to move higher through the summer will depend on how much support service centers as a group give to announcements in late June and early July. Clearly, the service center sector has more pricing power than most people realize.
|John Packard is a steel industry veteran and publisher of the Steel Market Update e-newsletter. SMU regularly conducts workshops on hedging and managing price risk with partners CME Group and Crunch Risk. SMU also does training on steelmaking and market fundamentals (Steel 101). For more information, visit www.SteelMarketUpdate.com.