uploads/2015/11/contract-sales1.png

Why Does 2016 Look Bleak for the US Steel Industry?

By

Updated

US steel industry

As we discussed previously, falling spot steel prices negatively impacted steel companies. However, steel companies face another challenge next year regarding their contracted sales. Please note that steel companies sell their products on spot steel prices or under long-term supply agreements. Several long-term supply agreements will come for renegotiations early next year.

Article continues below advertisement

Contract sales

In its Flat-Rolled segment, U.S. Steel (X) sells almost 50% of its produce on contract pricing. In the earnings call for 3Q15, U.S. Steel said that almost two-thirds to three-quarters of these contracts would be rolled over on January 1, 2016.

Speaking about the US automotive contracts, Louis L. Schorsch, CEO ArcelorMittal (MT) Americas said during the 3Q15 earnings call that “We have a little bit of experience with the softer market of this year in terms of negotiating. And I would say to date, certainly this spot environment does affect the outcomes here.”

2016 pricing

However, he also added that “we’ve had good success in making the argument that the current – particularly, the current spot levels are not sustainable and shouldn’t be used as a base line for these sorts of contracts.” Schorsch said he expects the downward adjustments in the future contracts will be “substantially less than the spot price movement.”

AK Steel has one of the highest percentages of contract sales in its sales mix. You can see this in the above graph. AK Steel’s (AKS) CEO, James L. Wainscot, also voiced concerns about contract pricing. During the company’s fiscal 3Q15 earnings call he said, “On the heels of the substantial decline in carbon steel spot market prices the latest challenge we’re facing is that our contract customers now want to pay lower prices for their steel as well.” Together, AK Steel and Carpenter Technology (CRS) form ~9% of the SPDR S&P Metals & Mining ETF (XME).

Lower spot prices combined with lower pricing in contracted sales could negatively impact steel companies next year. In the next part, we’ll discuss the steel industry’s outlook.

Advertisement

More From Market Realist