Guide to Stainless Steel and Alloy Surcharges
Every month, Stainless Steel producers announce their respective alloy surcharges. In some months, the values may be higher than other months and vice versa. While this information may be common among buyers of steel products, there are many in the industry who still don't know why the fluctuations happen, and what factors determine the changes in alloy surcharges.
Stainless steel and alloy surcharges are the additional costs above the base price for these materials. This terminology is common in metal manufacturing where manufacturers come up with different types of alloys to serve diverse purposes. The value is computed based on the alloy price and the amount of the various components or elements present in the alloy.
Three elements contribute to the price of steel. These are:
- Base price – Mills negotiate this with each customer individually, without including them in the volatile price shifts.
- Extras – This component describes the charges that are specific to the material. They apply to non-standardized product dimensions, and melt mills add or deduct them from the base price. Extras are applicable for surface finishes, special thickness, packaging, or any other similar aspects.
- Alloy surcharge – This is an instrument that passes on the alloy cost fluctuations along the value chain. These are usually product specific since calculations periods are different and the alloy components vary in grades.
The main reason why alloy surcharges exist is to offset the impact of raw material price fluctuations which can get really predictable. Companies offer surcharges to ensure all the essential material prices remain transparent and stable.
Source and Purpose of Alloy Surcharges
When metal manufacturers must contact different melt mills to purchase the necessary raw material for their processes, the prices of the different materials may vary which would result in them paying more for a particular material than another. Additions of chromium, molybdenum, and nickel have the most significant impact on the entire cost of producing stainless steel.
The prices of stainless steel alloys can be volatile, so producers have the responsibility to make the appropriate price adjustments. To avoid any frequent fluctuations or the scenario where they have to review their price agreements with clients several times a year, manufacturers began applying a monthly surcharge. The variable solely depends on the price levels of the respective alloying elements used to create the material.
The alloy surcharge would change every month, and mills required lots of time to negotiate the base price with clients. But with the introduction of surcharges, manufacturers can deal with the variations in alloy prices using a price correction above the base price to absorb the variations.
A high concentration of manufacturers in the stainless steel sector brings about the risk of attracting cartel authorities. As such, any price agreements in this industry are prohibited. That's why there's no standard alloy surcharge for every steel manufacturer.
Historically, alloy surcharge has been used to recapture costs on components with extreme price variations within the supply chain. This value was designed to last a longer duration, and mills adjust it based on fluctuations on these costs. It can also be removed once price stability is achieved.
How Alloy Surcharge Is Calculated
Different mills use unique approaches to compute the applicable alloy surcharge value. These methodologies are mostly private, and consumers may experience difficulties when determining the formulas that are currently in use. Regardless, all mills share a fundamental approach to calculate the value.
Most manufacturers first ascertain the average value of the relevant item among the different alloying elements which contribute to stainless steel or other alloys. The value of each element in stainless steel depends on the grade of stainless among other factors. When it comes to austenitic stainless steel, the cheapest of the elements might be iron or manganese, and their contribution to the computation is negligible, but this is not the case across the board. Their average values are based on the one-month duration before calculation, but other mills go the extra mile of computing the daily surges. Melt mills will usually then deduct an individual reference value from the amount before converting it from dollars to the respective currency.
To get the alloy contribution to the surcharge, they multiply the value by the average alloy proportion in the material. The same calculation applies to the rest of the component elements. Adding the values together will yield the material's alloy surcharge. Any alloy with a higher reference value than the average cost doesn't contribute the alloy surcharge. There's no such thing as a negative surcharge.
It's normal to find fixed-rate surcharge factors for production-intensive product categories like wide rods, seamless tubes, and welded tubes. Different production steps create scrap and off-cuts. Therefore, the surcharge increases based on the number of transformations carried out to come up with the final product.
For instance, hot-rolled bars may have a lower surcharge value than cold drawn hexagonal bars. This is because the latter requires more production steps than the former.
Calculating Steel and Alloy Surcharges by Yourself
In principle, it is possible to calculate these surcharges on your own, but it will require a great deal of time and effort to complete the job. To begin with, you must determine the particular unknown alloying elements from each manufacturer. These include the prices of the necessary raw materials, their reference values, and weight of steel.
You must capture all the applicable values accurately, a task that's not easy if you lack the background knowledge and several years of experience. Fortunately, you can always count on Ulbrich for monthly updates on the applicable surcharges.
Stay Updated in A Simpler, Convenient Way
Stainless steel surcharges are a crucial pricing aspect. Their primary purpose is to offset the rapidly fluctuating cost of material necessary in the alloy manufacture. The additional charge isn't an extra expense on the buyer. Rather, it's a fundamental factor that significantly contributes to market stability.
While it may be technically possible to compute the value by yourself, you are more likely to find a wrong figure. You must capture all the necessary details accurately and apply the right calculation strategies.
Ulbrich relieves clients from this burden through the monthly PDFs, but there's some good news. The Ulbrich app, available via Android or iOS is faster, easier, and more convenient. You'll receive alerts on your smartphones, and hence no need to visit the website to learn the latest. Download the stainless steel surcharge app today to stay updated on the applicable stainless steel and alloy surcharges.