ArcelorMittal, the world's largest steelmaker, plans to boost prices on some steel shipments in the U.S. by $250 a ton, or about 33 percent of current prices, to recoup surging costs for energy and iron ore. The shares gained.
The surcharge will be added to contracted orders of flat- rolled steel for shipment May 5 and later, according to an April 14 memo to sales personnel from D.G. Mull, executive vice president for sales and marketing. The Luxembourg-based company won't add the charge to spot sales or contracts that already allow prices to fluctuate, the memo said.
ArcelorMittal is trying to take advantage of soaring global demand to pass on higher costs for iron ore, the main ingredient in steel, and the energy to produce and ship the metal. U.S. prices for flat-rolled steel rose to $740 a ton in March from $665 a month earlier, according to Purchasing magazine.
``The key is going to be, does everybody else go along with this?'' said Charles Bradford, a metals and mining analyst at Soleil Securities in New York. ``You can bet that the auto guys are going to be yelling and screaming about it.''
ArcelorMittal advanced 1.69 euros, or 3.2 percent, to 54.94 euros in Amsterdam. The gain was the biggest since March 12. The shares have added 3.6 percent this year.
U.S. steel prices are climbing even as demand stagnates because higher prices in other regions and a weak dollar are attracting the exports usually destined for North America. Hot- rolled coil, another key industry product, may now cost a record $1,000 a ton on the spot market, according to Robert Miller of Miller Mathis, a New York investment bank focused on steel.
`Gutsy Move'
``This is a pretty gutsy move testing the contract provisions,'' said Scott Burns, an analyst at Morningstar Inc. in Chicago. ``I can imagine if they signed contracts at $400 or $425 a ton they would want to bring prices up to spot levels.''
Haroon Hassan, a London-based spokesman for ArcelorMittal, declined to comment.
U.S. Steel Corp., the largest U.S.-based steelmaker, will work to get the ``market price'' for its steel, spokesman John Armstrong said. He declined to say whether the company will follow ArcelorMittal's move.
Nucor Corp. Chief Executive Officer Dan DiMicco declined to comment in an e-mail to Bloomberg News.
``We will continue to honor our contracts,'' said Alan McCoy, a spokesman for AK Steel Holding Corp., the third-largest U.S.-based steelmaker. ``Most of our contracts for the last seven years have had a variable pricing component,'' he said.
Steel Dynamics Inc. spokesman Fred Warner said in an e-mail that ``virtually all'' of the company's flat-rolled product sales contracts allow prices to rise with a scrap-metal cost index. The company is the fourth-largest U.S.-based steelmaker.
General Motors
General Motors Corp. sued Steel Dynamics in March 2004, arguing that the steelmaker reneged on an agreement to sell it 50,000 tons of the metal at a specific price. Steel Dynamics said that no agreement existed.
Nucor rose $3.85, or 5.6 percent, to $72.66 as of 1:06 p.m. in New York Stock Exchange composite trading. U.S. Steel added $6.13, or 4.2 percent, to $152.76. AK Steel added $2.45, or 3.7 percent, to $68.60. Steel Dynamics climbed $2.25, or 6.4 percent, to $37.29 on the Nasdaq Stock Market.
Billionaire Lakshmi Mittal bought Arcelor for $38.3 billion in 2006 to boost bargaining power with customers such as Toyota Motor Corp. The company, which controls about 10 percent of global steel production, became the largest steelmaker in the U.S. after Mittal's Ispat Inland unit bought Wilbur Ross's International Steel Group in April 2005.
`Adequate Return'
``Where ArcelorMittal's preceding group of family companies in the U.S. gave away steel for a price that didn't cover the cost of capital, Mittal is requiring an adequate return,'' said Michelle Applebaum, who runs a steel-equities research firm in Highland Park, Illinois.
ArcelorMittal also is trying to mitigate greater concentration in the global iron-ore industry, where BHP Billiton Ltd., Rio Tinto Group and Cia. Vale do Rio Doce control about 80 percent of the seaborne trade in the steelmaking ingredient. ArcelorMittal is investing about $6 billion to boost iron-ore output from its own mines to 110 million metric tons, from about 60 million tons at the end of 2007.
ArcelorMittal earlier this month agreed to pay Vale, the world's largest exporter of iron ore, 87 percent more for the ingredient. Vale is charging Asian steelmakers about 65 percent more.
``The steel industry has seen unprecedented volatility in 2008, primarily as a result of cost increases related to iron ore, coke, scrap, energy and transportation,'' ArcelorMittal said in the memo. ``ArcelorMittal has attempted to mitigate the impact of these costs, however, the magnitude of the changes require us to implement a raw material surcharge.''
`Market Conditions'
The surcharge will be adjusted ``as the market conditions warrant,'' according to the memo.
The charge might add as much as $1 billion to costs at General Motors Corp. next year, according to Soleil's Bradford.
GM spokeswoman Deborah Silverman declined comment on the price increase in an interview.
``We don't, as a matter of policy, comment on specific changes in material costs,'' Ford Motor Co. spokesman Todd Nissen said in an e-mail. ``However, we closely monitor raw-material and commodity costs on a regular basis and adjust our internal business plans as necessary.''
The U.S. needs to import steel because domestic producers make only about 100 million tons a year while the nation uses about 130 million tons.
``By the end of the year, the concept of fixed-price steel will be virtually done away with,'' Applebaum said. ``The entire pricing mechanism was something that didn't exist until the commodity price deflation of the 1980s/90s, so it makes sense that this would disappear in the current environment,'' she said.
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