Why do the US and EU stainless steelmakers need an alloy surcharge mechanism to set market prices? The answer is that they do not. More than half global output is sold using traditional buyer/seller negotiations to make settlements. Moreover, when the going gets tough, Western mills are prepared to negotiate effective prices or manipulate the surcharges in order to secure agreements in the short term. The mechanism is perpetuated because it provides significant benefits for the steel producers through most of the cycle.
Copper tube and pipe mills in the West do not operate surcharges for their sales - neither do aluminium extrusion manufacturers. The cost of the input metal represents a major proportion of the selling figure for their products and it is quoted on the LME.
The stainless producers are large enough to hedge their purchases of nickel, which represent a major proportion of the cost of input material. This is the "raison d'être" of the LME. Why should the stainless steel consumers suffer the volatility in pricing that has plagued the industry for so long in the two main Western regions?
The irony of the surcharge mechanism is that the higher the price of raw materials the more profit is made by the mills. If high input costs bit into margins, as in most other manufacturing sectors, there would be an incentive to keep alloy prices under control. Volatile pricing in the austenitic sector is stunting the growth in demand. Substitution has already occurred. Uncertainty in pricing could restrict further uses for the material.
Posted April 1st. 2009