Evolving Stainless Steel Surcharge System ? An Inconvenient Reality

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By: Badri Narayanan -- Lead Analyst

19 March, 2014

Evolving Stainless Steel Surcharge System ? An Inconvenient Reality
WHITEPAPER

1. Introduction: The implementation of a new daily surcharge price system in Europe has rekindled the debate among stainless steel consumers and producers regarding the viability and fairness of the raw material surcharge price system. 2. Main: Stainless steel is unique among steel alloys in the way that its price is impacted continuously by a high degree of fluctuation witnessed in its raw material?s prices (mainly nickel?s price). This volatility in raw material price adversely impacts the input cost for stainless steel mills, while also affecting the consumers and their business operations. While the mills in the Western countries (in the US and European countries) follow a surcharge price system to include the raw material price volatility in the final price of stainless steel, the mills in Asia with a less transparent pricing policy do not follow such a system. This surcharge policy has been the point of contention between the mills, distributors and consumers. 3. Recommendation: The need for a robust and fair pricing system for stainless steel is leading to an evolution in the existing pricing mechanisms and increasing dissent among consumers against the existing system. The new daily surcharge system offered by some producers provides flexibility to buyers in terms of pricing decisions. However, the presently adopted monthly surcharge system (inspite of its disadvantages) clearly is the best viable option as compared to other options such as a daily surcharge system (which will only increase the volatility and order fluctuations). Any buyer relying on gaining price advantage through daily prices will be taking a big gamble. A buyer has to get the right balance across the three parameters i.e. inventory, mill lead times and the daily price. Striking such a balance is challenging. Buyers have to be conscious of their inventory levels and the mill lead times before delaying/advancing their date of purchase based on price favorability. The monthly surcharge system, even though has its fair share of disadvantages (along with the inconvenience caused to both mills and consumers) is still the best mechanism to mitigate the price volatility associated with nickel and hence it is an inconvenient reality for consumers and producers.




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