MetalMiner welcomes guest contributor Badri Narayanan, a lead analyst at Beroe Inc., who specializes in tracking various steel markets and related alloys. Beroe is the premier global provider of customized procurement services specializing in sourcing, supply chain visibility, financial risk analysis and environmental impact to Fortune 500 organizations. With nearly 400 dedicated procurement specialists in 38 domains, across 9 industries, Beroe proactively invests in knowledge assets to build valuable, real-time procurement insight. This is the fourth and final part of his series on stainless steel pricing and alternative pricing systems for this most market-price affected metal.
A comparison of the daily surcharge for January 2014 along with the monthly surcharge for the same month reveals the variations. The daily surcharge ranged from a low of 990 Euro per MT (on 8th Jan, 2014) and 1,100 Euro per MT (on 23rd Jan, 2014), while the monthly surcharge was at Euro 997 per MT (based on December 2013 nickel average price.) A distributor, who placed the order on 8th Jan, 2013 could have saved Euro 8 per MT (as compared to monthly surcharge) whereas a buy on 23rd January would have resulted in a premium of Euro 103 per MT (vs. monthly surcharge).
As is evident from these figures and the graph, the daily surcharge system is adding to the volatility rather than mitigating it.
While the daily surcharge option provides the opportunity for a buyer to lock in a purchase at an attractive price (at Jan 8th, 2013), it is highly difficult to get the exact date during which the surcharge will be lowest. Any buyer relying on gaining price advantage through daily prices will be taking a big gamble. Buyers have to be conscious of their inventory levels and the mill lead times before delaying/advancing their date of purchase.
Only Outokumpu along with Aperam have rolled out this measure, the monthly surcharge option is also being continued, for European distributors, other European players along with American mills have continued with their existing system. Due to these factors, it remains to be seen to what extent the daily surcharge system will be accepted by the market. Considering these difficulties, Outokumpu has announced that it will review the acceptance and collect the market feedback on the new system and decide if any changes, such as scrapping the new system, will be required.
Viability: Low to Medium
Due to the uniqueness of stainless steel—its price being driven by the volatile nickel prices—other pricing systems, similar to ones followed in steel pricing such as index-based pricing, raw material price, slab etc.—cannot be adopted.
The volatility associated with nickel prices, and hence stainless steel prices, adversely impacts the input cost for stainless steel mills. Although hedging options are available—and most of the mills are involved in using financial instruments to hedge against this volatility—it is still impossible for the mills to manage the costs without a mechanism to pass on this volatility to consumers. Considering this, the raw material surcharge system is the best possible option for consumers and mills. Within this mechanism, the presently adopted monthly surcharge system—in spite of its disadvantages—clearly is the best viable option as compared to other options such as a daily surcharge system—which will only increase the volatility and order fluctuations—or a quarterly or bi-monthly system, which will significantly increase order fluctuations.
Hence, in the developed markets of the US and Europe, a raw material surcharge system is an essential and fair mechanism to manage and share the risks associated with nickel price volatility between the consumers and the producers.