Author Archives: Badri Narayanan

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.

Outokumpu's daily vs. monthy surcharge prices.

Outokumpu’s Daily and Monthly surcharge price (for 304 flat) for January 2014.

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.

Read more

MetalMiner welcomes guest contributor Badri Narayanan, a lead analyst at Beroe Inc., 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. In this third part of of his series on stainless steel prices, he explains Outokumpu’s alternative pricing model.

Alternative Pricing System for Buyers:

This volatility has prompted the consumers to seek a more stable pricing system from the mills.

a) A pricing system without surcharge

The US, Europe and China account for 76% of the global stainless steel supply market, whereas the US and Europe alone account for about 30% of the global market. While the US and European markets follow a surcharge-based system, the Chinese market (by far the largest) is dictated by the pricing policy of the Chinese state-run mills, which publish prices on a periodic basis. This policy is devoid of any surcharge component and hence there is little transparency on the pricing policy of the government-controlled mills. The Chinese mills have the advantage of low cost of production. Chinese mills predominantly use Nickel Pig–Iron, a low cost, but with a polluting production process, instead of other expensive forms of nickel. This provides the Chinese with the luxury to not follow the volatile surcharge system.

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 part two of his in-depth analysis of stainless steel pricing systems across the globe: “Stainless Steel Surcharge System—An Inconvenient Reality.”

Among all the commercial grades of stainless steel, the 304 grade and the 316 grade are the most widely used and also the most highly impacted grades due to raw material price volatility.

The 304 grade, with 18% chromium and 8% nickel is widely used in home appliances, process equipment and heat exchangers, whereas the 316 grade with 18% chromium and 10% nickel is commonly used in making surgical equipment, pipelines and process equipment. The high nickel and chromium content in these grades makes them highly susceptible to raw material price fluctuations.

Read more

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 first part of Narayanan’s series on stainless steel pricing systems “Stainless Steel Surcharge System—An Inconvenient Reality.”

Stainless steel pricing follows a unique mechanism, unlike most other industrial steel alloys. The alloy which is primarily used in making utensils, equipment and pipelines, is highly influenced by the volatility in its raw material, mainly nickel, prices.

In order to mitigate the volatility and protect their operating margins, stainless steel mills in the US and Europe follow an “alloy surcharge” based pricing system. This system ensures that the risk of price volatility is shared equally by both the stainless steel mills and consumers.

Under this surcharge based system, stainless steel price comprises two components, i.e. a base price and an alloy surcharge. The base price remains constant over long periods and is reflective of the operational cost excluding the raw material cost. The constituents of base price include fixed costs, minor consumables, labor and energy costs and other production costs such as a rolling charge. Typically the base price constitutes 30-45% of the total stainless steel price.

The alloy surcharge reflects the raw material cost and it is calculated on a monthly basis, based on the raw material average price over the previous month using various raw material indices. For example, the alloy surcharge for the month of January 2014 will be based on the average raw material price between the third week of November 2013 and third week of December 2013.

This system of following a month’s lag in calculating the price was adapted in September 2011 in the US, replacing a previous system in which a two month lag period was followed. This shift was aimed at curbing speculative buying and adding a more accurate reflection on the raw material price fluctuations.

Point of Contention

The surcharge based pricing system followed predominantly in Europe and the US has been under contentious debate over its adverse effect on a consumer’s business operations. The volatility in nickel price gets transferred into the stainless steel price through the surcharge, leading to price fluctuations on a monthly basis. Producers of industrial equipment and other such users of stainless steel are adversely impacted by such fluctuations. These producers find it difficult to pass on the price fluctuation to their end use consumers – i.e. users of stainless steel equipment, utensils, pipes etc.– thus impacting their business margins. This results in price fluctuation across the value chain, beginning from the stainless steel mills and ending at the end-user’s business.

We’ve looked at how plummeting ferrous scrap prices post-2008 impacted steel contracts, what CRU-minus was originally all about, and the possible scenarios of what steel mills may do with contract pricing next year.

So what will be the impact on consumers?

But first, the extent to which the steel mills will be successful in switching to the new pricing system will depend on the following:

  • Steel mills remaining united and strong in their stand on the new pricing mechanisms
  • Domestic mills exhibiting production discipline to draw down any surplus in the market
  • The US Fed quantitative tapering not having a significant impact on steel demand
  • Domestic demand showing healthy improvement in 2014

In short, the extent to which mills can be successful in the new pricing system will largely depend on steel demand remaining healthy along with prevention of any surplus in the market.

The level of impact on steel consumers due to the pricing shift by mills will vary greatly depending on the size of the consumer.

Read more

Although more than two months have gone by since it clearly emerged that all the major steel mills want to move away from the “CRU-minus” pricing system, a consensus between mills and consumers for next year’s contracts remains elusive. Catch up on the context of steel contracts and CRU-minus here.

Without much progress in the negotiations between steel mills and consumers, we’ve put together three distinct possibilities that could pan out in the coming months:

Read more

Raw-Steels-price-index-december-2013-metalminer

Still a weak sector…

As many of us are well aware, after long-term price contracts gave way to short-term ones, steel mills began to incorporate index-based pricing in their contracts. We laid the groundwork here in Part One of this series.

Based on the engagement with customers, either the previous month’s index was rolled over as the next month’s price in the case of monthly pricing, or the previous quarter’s price was rolled over as the next quarter’s sale price in the case of quarterly pricing.

FREE Download: The Monthly MMI® Report – covering the Steel/Iron Ore markets.

Following the onset of a gradual slowdown in the US economy after 2011, except for strong auto sector demand, demand from all other sectors started weakening. This was reflected in shorter lead times for steel, with HRC lead times falling to as low to 2-3 weeks in 2012.

While demand was slowing down, steel mills remained slack in lowering their operating rates. Lack of production discipline among mills led to operating rates remaining at 80% by April 2012. The steady flow of imports, mainly from East Asia, compounded this further and resulted in a surplus. Steel mills started losing ground in terms of pricing and to beat the tight competition for limited demand, mills started offering discounts on index-linked price.

Read more

In 2014, profound changes in the US steel sector are expected and along with them, significant consequences as well.

Federal monetary policy, sluggish economic recovery and lack of cohesion between the steel mills and buyers are some of the key factors contributing to the changes. As the new quarter and year has just begun, intense negotiations between mills and large consumers are under way for new contracts for the upcoming quarter and year.

The announcement by major mills of discontinuing the practice of discounting on the CRU index (commonly referred to as “CRU-minus” in the market) has raised many questions among consumers.

FREE Download: The Monthly MMI® Report – covering the Steel/Iron Ore markets.

How About Some Background?

Read more