NEW EU STAINLESS STEEL ALLOY SURCHARGES NOT HELPFUL TO BUYERS

Three of the four major EU stainless steel producers have announced significant changes to the method of calculating alloy surcharges. ArcelorMittal, Outokumpu and TKS have each devised similar mechanisms. In all cases the reference period for determining the cost of the alloys has been moved from between two and three months to just five weeks before the month of delivery of the steel.

The other large producer, Acerinox, stated that it will not modify the current system. This will almost certainly benefit the company's order position in the short term because the proposed method is detrimental to customers. It gives buyers no time to estimate their input costs to enable firm quotations to be made. In most engineering sectors, suppliers are required to give fixed prices for deliveries up to six months ahead.

We believe that the new alloy surcharge mechanism is ill conceived. It is a "knee jerk" reaction to losses the mills suffered in the third quarter of this year when it was clear that alloy surcharges would fall after the collapse of the nickel price in mid year. It takes no account of the substantial profit made in the prior months when the nickel price was spiralling upwards.

The alloy surcharge system was brought in many years ago after the mills were forced into buying nickel based on the LME price. The old producer price was discarded. The steel producers and customers were then open to the vagaries of the metals market. Consequently, an alloy surcharge system which was fair to both sides was devised.

Over the years, the steel makers honed their hedging skills and they all buy on forward contracts. The daily LME cash nickel price (the reference for the alloy surcharge) does not mirror the price paid by the mills. The advantage has moved in favour of the steel makers. Now they are looking to further that benefit.

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

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