Alloy surcharge

The alloy surcharge (AS) is a price supplement, which steel manufacturers add to the basic price for stainless steel products (see image below). It reflects the value of the alloying elements present in those products.

All price components include margins

Since the quantities of the alloying elements vary depending on the stainless steel materials, steel mills calculate a separate alloy surcharge for each grade. In addition, there is a distinction between product types. The following table provides an example:

Alloy surcharges: August 2019
Prices in € / tonne Source: Outokumpu
Grades		Product types
EN	ASTM	Flat products	Billets	Wire rod	Hot rolled bars	Cold drawn bars
1.4301	304	1382	1335	1433	1469	1651
1.4307	304L	1382	1335	1433	1469	1651
1.4401	316	2123	2119	2274	2331	2620
1.4404	316L	2123	2119	2274	2331	2620
1.4571	316Ti	2150	2146	2302	2361	2653
1.4305	303	1382	1335	1433	1469	1651

Stainless steel producers generally fix the prices of the alloy surcharges on a monthly basis and provide them to their customers a few days before the end of the month that precedes the month in which the alloy surcharges are valid (e.g. they publish the surcharges for August on the 29^th of July). Some mills also publish the surcharges on a daily basis and allow customers to decide whether to fix the alloy surcharge on the order date or on any other date between the order and delivery. This provides a more accurate current value of the alloys and gives customers more options in their purchasing strategies.

The use of an alloy surcharge is common practice in Europe. In other regions, mills usually do not charge a separate alloy surcharge, but take the value of the alloying elements into account as part of the final price.

The following paragraphs will focus solely on the European market.

Origin and purpose of the alloy surcharge

To produce stainless steel, manufacturers need to purchase different alloys from mines. Some of these raw materials are more expensive than others. In particular, nickel, chromium and molybdenum have a high impact on total production costs of stainless steel.

Furthermore, the prices of these alloys can be very volatile, making it necessary for stainless steel producers to adjust their prices accordingly. To prevent frequent price changes or having to make new price agreements with customers several times a year, European manufacturers started applying a variable monthly surcharge that was solely dependent on the price level of the used alloy elements. The alloy surcharge would change on a monthly basis, while mills could negotiate the basic price with customers for longer periods. Manufacturers were hence able to cope with price variations of the alloys by absorbing them through a price correction on top of the basic price.

Impact of cartel authorities on the alloy surcharge calculation

The high market concentration of stainless steel manufacturers has always had the warm attention of the cartel authorities. Price agreements in this sector are prohibited, thus blocking a standard alloy surcharge for all steel producers. In 2006, the European cartel authorities fined various stainless steel mills for collectively fixing the prices of the alloy surcharges in the mid 90’. The associated report states the details of the infringement and sheds some light on the way mills used to calculate the alloy surcharges in those years (s. box 1).

BOX 1: Extract from the Judgment of The Court Of First Instance (First Chamber) from 13 December 2001

“When nickel prices started to rise in September 1993, producers’ profits were considerably reduced. To remedy this, producers of stainless flat products agreed to increase their prices on a concerted basis by changing the parameters for calculating the alloy surcharge. To that end, they decided to apply, as from 1 February 1994, an alloy surcharge based on the method last used in 1991, taking for all producers the September 1993 prices as reference values, when the price of nickel had reached its historical low. Thus, producers calculated the amount of the alloy surcharge to be applied in a given month (M) as follows: they calculated the average price of nickel, chromium and molybdenum in the two months preceding the month before the month of calculation (e.g. in June and July for September). Then they compare the values thus obtained with the reference values (or trigger values) since February 1994, namely: ECU 3 750/tonne for nickel, ECU 5 532/tonne for molybdenum and ECU 777/tonne for chromium. Under that system, if the difference between the average prices and the reference values is positive, a price supplement is added to the basic price of the steel concerned for the month M. If it is negative, no increase is applied. The amounts reflecting a positive difference are multiplied by the percentage of each alloy in the quality of steel concerned. The agreement among stainless steel producers led to a virtual doubling of stainless steel prices between January 1994 and March 1995.”

 

Alloy surcharge calculation

Nowadays, every mill uses its own formula to calculate their alloy surcharges. These formulas are not public, thus making it difficult to determine the exact calculations currently in use. Nonetheless, the fundamental approach remains common to all.

Simplified alloy surcharge calculation:

Mills start by calculating the average value for each relevant alloy element present in stainless steels for a certain period in time. The relevant alloys are nickel, chromium and molybdenum. Manganese and iron are much cheaper and therefore negligible in the calculation. The mill calculates the average value of the relevant alloys for a defined period (usually 1 month) before the date of the calculation. Some mills even calculate the average values on a daily basis to provide daily alloy surcharge prices. The average value of nickel and molybdenum follow the stock prices on the London Metal Exchange (LME). There are two reasons for this: (1) mines use the LME as an indicator when selling the alloys to steel producers and (2) the LME allows steel producers to calculate the value of the elements at any time with full transparency. Because chromium is not listed on the LME, the average value of this alloy depends mainly on the prices that the mill negotiates with the mines (usually quarterly).

Some mills subtract from the average value of each alloy a respective constant reference value. The approach is analogue to the one mills used to have in the 90’ (s. box 1).

Since the stock prices on the LME are in USD, the average values calculated by the mills are in US dollars too, meaning they must be converted into the target currency of the customer (e.g. Euros). The exchange rate plays therefore an important role in final price of the alloy surcharge.

Mills then multiply the results by the average proportion of the respective alloys in the material. The average proportions are grade-specific and might slightly change from mill to mill depending on their manufacturing processes. In fact, producers can freely set their own proportions with the only constraint being the European standards, which define the threshold values of the alloys for a certain grade. For instance, according to EN 10088-3, the grade 1.4301 must have 17.50-19.50 % Chromium (Cr) and 8.00-10.50 % Nickel (Ni). To lower production costs, the real amount of nickel is usually at the lower end of these ranges. However, the percentage chosen for the alloy surcharge calculation might be a little bit higher.
This provides the value the alloys for a specific grade.

Finally, mills calculate different surcharge levels for several products depending on their yield factor (the ratio of the amount of output-material to input-material during production). The more material (and therefore alloy quantity) is required to produce a certain amount of the final product, the higher the alloy surcharge.
Since every production step creates off-cuts and scrap, the alloy surcharge typically increases with the number of transformations necessary to produce the final product. For instance, cold drawn hexagonal bars require more production steps than hot rolled round bars (billets or slabs are hot rolled into pre-shaped sections, which in turn are cold drawn to reach the tight tolerances of the final product) and therefore have a higher alloy surcharge for the same steel grade.

Mills generally differentiate between the following product families:

1. Flat products
2. Long products
   • Semi products / Billets
   • Wire rod
   • Hot rolled bars
   • Cold drawn bars
3. Tubular products
   • Welded tubes
   • Seamless tubes

In short, there are different alloy surcharges per grade and product groups, with their values largely being depend on the alloy composition of the material, the yield-factor of the product and the exchange rate.
Please keep in mind that mills probably use additional variables in their formulas and have different ways of determining the periods, the average alloy values, possible reference values, the weighting of the alloys and yield-factors.

The following standard products of Montanstahl fall under the alloy surcharge category of cold drawn bars: