Consumers have been pressing for a similar system in the US and Europe. However, due to the higher cost of production—Western producers need to hedge against the nickel price more actively unlike the Chinese mills—along with the lack of government subsidies, European and American mills cannot implement a surcharge-less system. The major mills in the West have been taking significant losses for a while now due to the slowdown in their economies and consequent impact on demand. This added financial burden will compound the requirement for continuation of a surcharge system to pass on cost volatility to consumers.
b) Flexible Surcharge options
While the US and European producers have been following a rigid monthly surcharge system, consumers have been continuously pressing for more options beyond the monthly surcharge system.
The recent move by Finland-based producer Outokumpu to address this concern has created ripples in the European market. Outokumpu has provided the option of a daily surcharge price calculated by the same mechanism as a monthly surcharge, i.e. based on nickel, scrap and chrome prices for deliveries to distributors from January 1, 2014. Under the new system, distributors will have two options:
- Effective Pricing System – Under this, the surcharge is locked on the date of order based on the daily surcharge rates published by Outokumpu
- Selective System – Through this option, the buyer can pick the any day between the date of order and date of delivery and pay for that corresponding day’s surcharge price.
The new system provides the consumers the luxury and flexibility of booking orders based on a daily price. However, Outokumpu’s intention of reducing order volatility—as consumers previously stayed away from ordering based when the nickel price was downwards—through this new system will not work out. Distributors will still continue to reduce order when the nickel prices slide and look to increase orders when the prices start recovering. Another of Outokumpu’s stated intention was to reduce the price volatility, however daily price movements as opposed to monthly prices will only lead to an increased volatility.