Monday, June 02, 2008

Coping with Steel Surcharges

At a time when buyers responsible for the purchasing of steel are facing a difficult and uncertain time, they need all the advice that they can get. Past experience is of little use in these unprecedented times.

We came across this article at Supply Excellence, with some good advice.

Even if they use a euphemism like “market adjustment”, the recent steel surcharges announced by ArcelorMittal, US Steel, WCI Steel and other mills feel like a price hike to buyers. Many companies were taken aback by the unprecedented move, which jacked up prices they thought were contractually locked in place. But in this market - where steel is a very hot commodity - few buyers think they have any choice other than to take it on the chin until the market cools.

We can have a bit of sympathy for US producers since their costs for raw materials have risen substantially in the past year and they’re feeling the heat from China and other mills abroad. But a great deal of the price increases stems from simply cashing in on the laws of supply and demand. After years of hard times, they’re enjoying the good times while they last.

But even in this challenging environment, there are some things you can do to help control costs, both in the short term to deal with current cost pressures and in the long term to better prepare yourself for the volatility in the market.

Short term, you need to know your cost drivers. The steel price from integrated mills should correlate closely with the price of iron ore. And the price from a mini-mill should be tied closely with the scrap price. Any deviation from that is typically due to mills opportunistically following the price hikes of their competitors. For example, despite no change in the scrap price, a mini-mill will raise prices to match the hikes of integrated mills (which are reacting to iron ore markets). Integrated mills are guilty of following scrap prices as well..............

Read the full article here


No comments: