European steel producers in contract conundrum

European steel producers could be caught between the grip of shorter-term contracts with raw material suppliers, and end-users demanding contracts without index linked conditions, say UK based analysts, Platts.

Some customers, particularly those in the automotive sector, are hoping to move away from shorter-term deals with index-linked raw material components. Many feel these contracts were imposed upon them after 2008, as steelmakers tried to pass on more regular fluctuations in the cost of iron ore and coking coal.

Once raw materials were priced on quarterly and monthly agreements, new steel contracts developed in Europe stipulated that hot rolled coil and other products would have a base price and a raw materials ‘adjustment’. This adjustment, which accounts for iron ore, coking coal, scrap and ferroalloys, tends to move depending on the length of the steelmakers contract with its raw material suppliers. For example, if a mill has a quarterly price for its iron ore and coking coal, the surcharge contained in its steel contract will also move quarterly.