Every month, stainless steel producers announce their respective alloy surcharges. In some months, the values can be higher than in other months and vice versa. Although this information may be very common among steel product buyers, in the industry there are those who still do not know why these fluctuations occur and what factors determine the changes in alloy surcharges.
The surcharges for stainless steel and alloy are an additional cost on the base price of these materials. This terminology is common in metal manufacturing, where manufacturers create different types of alloys to serve different purposes. The value is calculated based on the cost of the alloy and the quantity of the various components or elements present in the alloy.
There are three elements that contribute to the price of steel, these are:
- Base price: This cost is negotiated with each customer individually, without including them in volatile price changes.
- Extras: This element describes specific changes to the material. These apply to non-standard product dimensions and melting mills add or deduct them from the base price. Extras are applicable to surface finishes, special thicknesses, packaging or any other similar aspect.
- Alloy surcharge: This is a tool that passes the fluctuations in the cost of the alloy through the value chain. These are usually specific to a product as the calculation periods are different and the components of the alloy vary in degrees.
The main reason why alloy surcharges exist is to compensate for the impact of fluctuations in the cost of raw materials, which can become predictable. Companies offer surcharges to ensure that the cost of essential material remains transparent and stable.
Origin and purpose of alloy surcharges
When metal manufacturers need to get in touch with different casting mills to acquire the raw material necessary for their processes, the prices of different materials can vary, which would make them pay more for one material than for another. Additions of chromium, molybdenum, and nickel have the most significant impact on the cost of stainless steel production.
The costs of stainless steel alloys can be volatile, so manufacturers have the responsibility to make appropriate adjustments in cost. To avoid frequent fluctuations or the scenario in which multiple revisions of the agreed price with the customer are required throughout the year, manufacturers apply a monthly surcharge. The variable only depends on the price levels of the respective alloy elements used to create the material.
The alloy surcharge would change every month and steel mills would need a long time to negotiate the base price with customers, but with the introduction of surcharges, manufacturers can deal with variations in alloy costs using a price correction above the base price.
A high concentration of manufacturers in the stainless steel sector carries the risk of falling into a monopoly. As such, any price agreement in the industry is prohibited. This is why there is no standard alloy surcharge for each steel manufacturer.
Historically, the alloy surcharge has been used to recover the costs of components with extreme price variations within the supply chain. This value was designed to last longer and steel mills adjust them based on fluctuations in these costs. Once stability in cost has been achieved, it can be omitted.
How is the alloy surcharge calculated?
Different steel mills employ unique approaches to calculate the applicable alloy surcharge value. These methods are usually private, so consumers may have trouble determining the formulas currently in use. However, all steel mills share a fundamental approach to calculating the value.
Most manufacturers first calculate the average value of the relevant item among the different alloy elements that contribute to stainless steel or other alloys. The value of each element in stainless steel depends on the degree of "stainless" among other factors. When it comes to austenitic stainless steel, the cheapest element can be iron or manganese so much so that their contribution to the calculation is insignificant, but this is not the case in all cases. Their average values are based on the duration of a month before making the calculation, but some steel mills make an extra effort to calculate sudden daily increases. Generally, casting mills will deduct an individual reference value from the amount before converting it from dollars to the corresponding currency.
To obtain the contribution of the alloy to the surcharge, the value is multiplied by the average proportion of alloy in the material. This same calculation applies to the rest of the element components. The sum of the values results in the alloy surcharge of the material. Any alloy with a reference value higher than the average cost does not contribute to the alloy surcharge.
It is normal to find surcharge factors at a fixed rate for categories of intensive production products, such as wide rods or welded tubes. Different stages of production generate waste and cuttings, so the surcharge increases, based on the number of transformations required to obtain the final product.
For example, hot-rolled bars may have a lower surcharge value than cold-drawn hexagonal bars, as these require more stages in their production process.
Stay updated in a simple and convenient way
In principle, it is possible to calculate these surcharges yourself, but it requires a lot of time and effort to do so. To start, the particular and unknown alloy element from each manufacturer must be determined. These include the prices of the necessary raw material, its reference value, and the weight of the steel.
All applicable values must be accurately captured, a task not easy if you do not have knowledge and several years of experience. Fortunately, you can always count on Ulbrinox to consult the monthly updates on applicable surcharges.
At Ulbrinox we provide this information so you don't have to worry about surcharges on stainless steel and its alloys.
