Some Japanese steelmakers are for the first time offering automotive steel sheet priced off the spot price of steelmaking raw materials to local and international carmakers, executives at large steel and automotive companies told S&P Global Platts this month.
This is a significant milestone, as auto sheet sold on long-term contracts in Japan has historically been agreed at a fixed price renegotiated every three or six months, typically first set by market leaders Toyota Motors and Nippon Steel and Sumitomo Metals Corporation.
This differs from Europe, where such raw materials-linked steel contracts have existed for several years, resulting in some carmakers hedging their exposure to iron ore prices using derivatives.
One Japanese carmaker reported being offered steel using a formula referencing Platts benchmark IODEX iron ore assessment and Platts Peak Downs Region coking coal assessment, together with some extra premiums reflecting other steelmaking inputs and costs.
These two assessments were used in isolation and not as part of a basket, which is a common practice in some commodities. As part of the pricing formula, these were then multiplied by the ratio of raw materials needed to produce 1 ton of steel.
The offer stipulated that steel produced in July to September 2017 would be priced using the average of raw materials over the previous quarter minus one month ie, in this case March to May 2017.
Some steelmakers are understood to be sticking to quarterly fixed-price contracts, which could result in a variety of pricing systems coexisting for Japanese auto sheet contracts.
The inclusion of iron ore and coking coal indices in steel pricing would allow steelmakers to pass on the price volatility risk for these two major cost components of steelmaking to their customers, potentially even helping them to lock in a profit margin.
The move comes just a few weeks after Japan's largest steelmaker Nippon Steel and Sumitomo Metals Corporation admitted it had started using coking coal indices in its procurement, setting a trend which other Japanese steelmakers followed.
Most of the country's steelmakers reference both Platts and TSI coking coal indices in a basket, while a minority of contracts also include a third index published by another firm.
Meanwhile in steel, pricing physical cargoes on the basis of published indices is an emerging practice, currently done sporadically. Factors that may drive its growth include the market's growing weariness of heightened price volatility imported from the steel futures market in China which, owing to its sheer production and export volumes, has an overweight role in regional price-setting.
In hot-rolled coil, a major Japanese steelmaker is known to be selling a portion of exports to Southeast Asia on the basis of an index published by Platts. For rebar, an eastern Chinese mill has inked an annual contract with a Singapore-based trader pricing off monthly averages of the TSI index.
The widespread use of raw material and steel indices is prompting a greater interest from steelmakers in risk management tools such as derivatives, a banking source told Platts this week.
While cautioning that such interest often took time to materialize as actual liquidity, management teams at Asian steel mills were showing greater interest in learning about hedging, he added.
