Prices, Outlook for European Stainless Steel Market: Not In a Good Place

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According to Reuters, prices of stainless steel products have lost about 15 percent of their value in the last six months in Europe, mainly due to a fall in raw material costs and declining demand.

As a result, smaller distributors and traders are struggling with sharp drops in inventory values and some are even resorting to cancelling orders to avoid taking on high-cost metal.

Franz Rotter, a member of the board of Austrian steelmaker Voestalpine, is quoted as saying in an interview that there are no signals that the special steel market will turn around at least until next year. “It’s like the perfect storm,” he said.

“We have got the euro crisis and the recession, we have got overcapacity, we have got cheap imports and now a slowdown in China,” Rotter said, adding that no more than one or two stainless steel companies worldwide were still making money at present.

One trader was particularly pessimistic, saying, “My company’s view is that 2013 will be bad. Even worse than 2012.”

Under such circumstances, a change in the pricing structure for stainless steels is understandably back on the agenda. When everyone is making good money, no one wants to change the status quo; when everyone is losing money, they look for alternative ways of doing things.

Equally understandably, no clear consensus is emerging for what any new arrangement should look like. Most agree that the current system creates a surcharge that is unrepresentative of what the market is doing when metal is delivered.

Stainless steel pricing is currently composed of two elements, a base price and a monthly alloy surcharge, which today represents the biggest part of the price. The base price is agreed on between the mill and the customer on a monthly, quarterly or longer basis, while the monthly alloy surcharge is calculated using a formula based on the average price of nickel and of other alloys present in stainless steel, for the month or two months before the booking.

The supply chain games the system, seeking to move before the number is formally announced by the mills. So when nickel prices fall, European customers often delay or cancel their purchase or buy lower volumes, in spite of what is agreed in the contract.

Many, however, say they would like to see fixed prices without a base and surcharge, prices fixed for the month, quarter or even year ahead. That would require mills to hedge their nickel and other alloy exposure, and it is not clear they would be willing to do that; they may well point to customers’ previous tendency to cancel contracts when alloy prices fall steeply.

Others would like the alloy surcharge to have a smaller weight on the final price, Reuters reports, and would like it to be tracking the daily nickel price on the LME rather than the average of the previous month or months.

Whether the industry can reach a consensus is unlikely in the short term, but clearly it is an issue that many would like to see explored further.

Ideas on a postcard, please.

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