***COMMENT: My flexible friend

It was bound to happen. The world’s largest steelmaker has started talks with some of its key industrial customers to change the way it prices its annual contracts in Europe

It was bound to happen.

The world’s largest steelmaker has started talks with some of its key industrial customers to change the way it prices its annual contracts in Europe.

Now that the company, along with other steelmakers, buys its iron ore on a quarterly, index-linked basis, it plans to invoice these more regular fluctuations to its customers.

It’s inconceivable that other leading steelmakers in Europe aren’t having similar discussions with those of their customers that purchase steel in this way.

What the new system will be remains to be seem. ArcelorMittal, for one, is focusing on the price component.

It’s unlikely it will introduce a surcharge system, like the one it uses for scrap when it calculates its European sections prices, for example.

Whichever way it goes, more annually-priced contracts for steel in Europe are unlikely.

The Whirlpools and BMWs of this world aren’t likely to be happy about that, and the markets don’t seem to have digested this news properly yet.

But OEMs and other large-scale consumers like these are prepared for the change. They’ve had to handle more volatile stainless steel prices for some time now.

Over the past few years stainless steelmakers in Europe, and further afield, have done their best to manage extremely volatile raw materials prices, particularly for alloys.

So was born the alloy surcharge system.

In its early days, European alloy surcharges were calculated using a three-month reference period — taking the average of various materials prices over the preceding quarter and crunching them through a transparent formula.

Things have changed a bit since then. Now most stainless mills don’t circulate the formula they use to calculate the surcharge, and nearly all are calculated using a one-month reference period.

Having a longer reference allowed consumers to adjust their buying in line with price fluctuations, and producers were still left wearing some of the cost of volatility, despite their best efforts.

Iron ore prices will likely follow a similar path.

Most people now believe that the new quarterly prices are just the first step in a wider move to even more flexible pricing. 76% of respondents to MB’s latest poll think so anyway.

And at least one of the major miners would be willing to agree prices on a monthly basis if its customers feel the need. MB suspects, in fact, they all would.

And you can bet, if that happens, it won’t be too long before steel contracts are being looked at month-by-month also.

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