January 14, 2005

About Alloy Surcharges:
The significant variation in the cost of alloying elements especially nickel, in stainless steel products has created the necessity for steelmakers and steel users to find a means of compensating for the significant shift of material purchase prices on a month to month basis.

The means by which this has been achieved is to institute a surcharge system which provides for calculated increases on a monthly basis when there are excess or extra costs added in the form of a surcharge for the various elements. These elements are nickel, chromium and molybdenum. (and more recently ”Iron” has been added to the list).

In point of fact the surcharge system has been in place on a wide range of steel products for a number of years e.g. sheet, bar, plate, tube, wire and wire rod. At times when the cost of the alloying elements is low or below specific levels called thresholds then the value of the surcharge will be zero for that month.

How are the surcharges calculated?
As an illustration, let’s consider a 316L stainless alloy. Use an average nickel content of 12% and calculate the February 2005 nickel surcharge component.

The nickel surcharge is calculated by comparing the accepted world market price (A) against the base or threshold level of $3.00/lb (B). We must then factor this comparison or difference into a 12% nickel content in 316L.

(A) Is defined as the average monthly cash value for nickel as traded on the L.M.E., for the two months prior to the month of delivery, i.e., the February 2005 surcharges will be calculated using the December 2004 monthly cash average ($6.1437/lb).

(B) Is the base or threshold level of U.S. $3.00/lb so we take the (A) - (B) value $6.1437 - $3.00 = $3.1437 and apply the 12% = 3.1437 x .12 = $0.3772 per lb

You should bear in mind that certain stainless alloys may carry higher values for nickel surcharges because of yield loss at the melting stage.

Which elements comprise the Surcharge System?
Chrome, Molybdenum and Iron are included as surcharges in addition to nickel for many stainless alloys.

A similar method of calculation is used for chrome and molybdenum but the base or threshold values for these elements are different. For chrome the base or threshold value is US $0.693/lb. For molybdenum the base or threshold value used is US $30.30/lb. Iron is based on scrap value (0.1808/lb).

There is not always universal agreement on either the base or threshold levels between different producers or suppliers in different areas. Some producers or suppliers utilize a base or threshold level for nickel of $US $2.00/lb. This has the impact of significantly increasing the surcharges when you substitute US $2.00/lb as the (B) value in the calculation above.

This letter is provided to give an interpretation of what a surcharge is and how that number is arrived at. It is in no way meant to be an absolute tool for figuring precise surcharges.