MANY EU STAINLESS MILLS TEMPORARILY ABANDON ALLOY SURCHARGE LINK

Over the years, the EU stainless steelmakers have gained from the linkage of the LME nickel price and the alloy surcharge mechanism. For a large part of this decade the nickel figure was rising. This was partly the result of growing demand for stainless steel but in the twelve months leading up to the crash in May 2007, speculators were said to be involved in the jump in values.

The introduction of the alloy surcharge method was always a "soft option" for the steel manufacturers. They devised a scheme that enabled them automatically to pass on changes in input costs to their customers. The mills, therefore, had no real incentive to pressurise the mining companies to lower prices. In fact, this was not possible because the cost of one of the most important elements (nickel) was set by traders on the LME.

For much of the recent past, the victims of this decision have been the stainless steel consumers as LME nickel prices went up tenfold in the six years from mid 2001. Since May 2007, the figures have been in steady decline. Originally, the surcharge calculation was based on the nickel price, three months prior to delivery. However, this allowed customers to predict the figure in advance. This had the effect of buyers placing orders early on the upside and delaying them on the downside.

Recently the alloy surcharge was modified to reflect cash nickel prices on a shorter time span. This was designed to restrict the stainless buyers' knowledge of future trends. It has not worked because weak demand has now put negative pressure on the ferro-chrome suppliers to reduce contract prices. The EU mills have provisionally abandoned their alloy surcharge mechanisms in favour of "effective prices".

Source: MEPS - Stainless Steel Review - click here for a free sample copy.

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