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Steelmakers Squeeze Suppliers

November 19, 2008 at 9:29 by Mario

Steelmakers are suspending and renegotiating contracts with their raw-material suppliers as they grapple with the sudden drop in demand for everything from cars and appliances to bridges and buildings.

Some customers want suppliers to cancel or postpone deliveries. Others are simply refusing deliveries and buying their coal, iron ore and scrap steel on the spot market, where prices have fallen below long-term-contract prices.

The unilateral moves put suppliers in a squeeze. If they don’t agree to delay shipments or lower prices, they could be left with no sales at all. At Chinese ports, ships laden with unwanted scrap metal sit stranded while scrap sellers scramble to find new buyers. The alternative, sending the unwanted scrap back to the U.S, is cost-prohibitive.

ArcelorMittal sent a letter to its German scrap-metal suppliers, who essentially are beholden to the world’s biggest producer of steel, saying the steelmaker has been forced by the global downturn to suspend contracts with the suppliers as of the end of last month. ArcelorMittal didn’t confirm the existence of the letter, which was reviewed by The Wall Street Journal, but said it “has taken voluntary, prudent and responsible steps to align supply with demand.. .. We announced on 5 November we have suspended some raw-material deliveries.”

Likewise, India’s state owned Rashtriya Ispat Nigam Ltd. wrote to several of its metallurgical-coal suppliers this month, asking them to cut prices 68% for the contract year ending next June. The steelmaker said it hadn’t received a response as of late last week.

The U.S.-based Institute of Scrap Recycling Industries, which represents 16,000 companies in the U.S. and abroad that collect and resell metals, paper and plastics, met this month with the U.S. Commerce Department to discuss how Washington could protect and enforce contracts. The Institute’s main complaint involved Chinese scrap buyers who are canceling orders and insisting on renegotiating prices at ports after deliveries arrived. Institute President Robin Wiener estimated that busted contracts with Chinese buyers are costing his members “hundreds of millions of dollars.”
Generally, it is easier — and less expensive — to renegotiate contracts instead of going through the courts to enforce them, which can take years.

Buyers of scrap steel and other raw materials such as iron ore and coal need less of those products because demand for autos, appliances and buildings has decreased sharply. As demand has fallen, so have spot prices, which are frequently less than contract terms. Iron ore, for example, currently sells for about $70 a metric ton on the spot market. The contract price is about $90 a metric ton. That looked like a good deal when the contract was negotiated earlier this year and strong demand put the spot price at about $180 a metric ton. Scrap prices vary according to the metal and the quality. But many contracts for scrap steel were formed when spot prices were triple what they are now.

That means as steelmakers look to cut costs in the face of plunging demand, they prefer to buy ingredients on the spot market. But doing so involves getting out of long-term contracts.
Rather than have some customers walk away from contracts, the world’s biggest provider of iron ore, Cia. Vale do Rio Doce, said it is trying to renegotiate volumes, but not prices. It did as much with ArcelorMittal, CVRD said.

BHP Billiton, another large iron-ore producer, said some of its smaller customers, who are having difficulty obtaining credit, are trying to buy iron ore on the spot market and attempting to alter contract terms. “Many are saying I want to take the tons, [but] please don’t ship it in December, ship it in April,” said Alberto Calderon, BHP’s chief commercial officer. BHP said it is working with those customers and selling the iron ore contracted for December delivery on the spot market — at below-contract prices. BHP said it is generating less revenue than expected on the iron ore but is still making a profit on it.

Australian iron-ore producer Mount Gibson Iron Ltd. said earlier this month that three of its customers had defaulted on their contracts and refused shipments. As a result, the company had to find new customers, who agreed to buy the iron ore, but at a lower price.

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