Following on from the decision by Arcelor Mittal and Outokumpu Oy to offer annual fixed priced stainless steel contracts in Europe, there has been discussion about offering fixed surcharge contracts in the US as well. European mills came under a lot of criticism for offering fixed priced contracts largely because they have not been able to demonstrate how they would lay off the risk of raw material price fluctuations on their suppliers. Chrome contracts are typically fixed quarterly. Nickel fluctuates monthly although it is relatively simple for a major consumer like Mittal or Outokumpo to hedge their price risk on the LME, and annual iron ore contracts look like they are moving onto quarterly pricing agreements although the 2009 negotiations are far from settled.
Following modest firming of nickel prices in January, the US mills stainless surcharges for 300 series nickel bearing alloys will make a marginal increase in March. Service centers have voiced some interest in the idea of fixing surcharges for three month periods providing they can agree an amicable formula with the mills. According to AMM one distributor, Ta Chen, an LA based Asian import specialist, has even taken it on to fix the first quarter surcharge ” at the highest January level ” in their words to support their customers. In a falling market one can see the attraction for suppliers to fix the surcharge early in the quarter; the test will come when the market picks up or if the nickel price becomes more volatile. Suppliers that have not hedged their risk ” either by laying off the price risk by way of an agreement with their suppliers or taking a futures market hedge ” will be put under severe strain in maintaining the price. Buyers being offered such fixed priced contracts should satisfy themselves their supplier has taken appropriate measures to maintain the price structure come what may ” otherwise the problem could land back in the buyers lap when the supplier has to renege on the deal.
A better solution would be to accept nickel prices of $5/lb or more are here to stay and incorporate more of the nickel cost into the base price, thereby reducing the significance of the surcharge and hence it’s impact on the total price of the alloy. The current trigger for nickel to be included in the surcharge is just $2/lb. A higher base price and a lower surcharge would leave consumers paying the same total cost for their 300 series stainless but reduce the volatility.