COMMENT: The alloy surcharge: does it taste good or is it poison?

Metal Bulletin has received some tasty responses to the questions it posed last week about the ferro-chrome benchmark and, beyond it, the alloy surcharge charged by stainless steel mills for the nickel, chrome and molybdenum in their products.

Metal Bulletin has received some tasty responses to the questions it posed last week about the ferro-chrome benchmark and, beyond it, the alloy surcharge charged by stainless steel mills for the nickel, chrome and molybdenum in their products.

We noted last week that the discounts available on the ferro-chrome benchmark were not matched by discounts in the alloy surcharge, the means by which stainless mills attempt to pass raw material costs on to their customers.

We asked whether the industry downstream of the steel mills would have the power to force a change in the system; whether the mills themselves would; and what it would be replaced with.

The first question caused some surprise.

One person close to the stainless steel industry argued that mills’ willingness to allow customers to renege on or renegotiate their purchases of stainless steel meant the latter always got to look back, particularly at nickel prices, and decide whether to stock or destock on that basis.

Why, he contended, would those customers want anything but the status quo — even if they did not fully understand the equations by which the surcharge is created?

Nickel component of the surcharge vexes...
The chrome component of the surcharge is significant — as Metal Bulletin’s calculation that it could potentially be worth over $500 million to the mills shows — but, as others made clear, it is the nickel part of the surcharge that really exercises the entire industry.

And so it should.

Outokumpu, which is partly owned by the Finnish state, announced last week that it will post a loss of €40 million ($49 million) for the second quarter.

The reason?

A poor product? Far from it. Strong competition from Asia? Possibly a little bit.

...so allow customers to fix it
In fact, declining nickel prices “and [the] destocking among distributors” that ensued have driven the results of the company, which plans to take over ThyssenKrupp’s Inoxum stainless unit.

(Another way of looking at the losses and the takeover would be to see the proposed deal as the Finnish taxpayer funding the company to take excess capacity out of the market, while allowing some of the inefficiencies that contributed to the overcapacity to remain. Consolidation is necessary, but for as long as customers get to look back on nickel prices and the opacity around pricing remains it is unlikely to create much efficiency.)

Could mills not allow their customers to fix the nickel price over whatever period they wanted — on a given day, a monthly average, at a certain attractive price — and hedge it perfectly?

This is something the mills should be looking to fix themselves. Because when the recipe works it tastes good. When it doesn’t, it is poison.

We received some interesting comments this week.

What is your company’s stake in this? What do you think? Let us know.

Alex Harrison
aharrison@metalbulletin.com
Twitter: @alexharrison_mb

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
Proceed