Why has the alloy surcharge been so successful so far?
The alloy surcharge price system had the advantage that manufacturers hedged their raw material risk and buyers did not have to renegotiate every month. The alloy surcharge was generally only dependent on the raw material prices and was therefore comprehensible as a price component. A system that has been established for over 30 years.
Now to the question: Does the alloy surcharge still have any significance?
We need to take a closer look at the stainless steel production process. It cannot be denied that raw materials are an important part of the price composition of the product in the production of semi-finished products. Whether in Europe, China or India. Raw materials have to be purchased or calculated at market prices everywhere. There are essentially two different ways of producing stainless steel. On the one hand mainly with refined high-quality nickel and on the other hand with low-grade ferro-nickel, i.e. nickel pig iron (NPI) or stainless steel scrap. The use of NPI has been well established in Asia for years. However, according to research by SMR (SMR Stainless Steel Club), the first attempts to process NPI are now also being made in Europe this year. It is important to know that the production of semi-finished products from NPI generates significantly higher CO² emissions than the production with high-quality nickel or the production of semi-finished products with a high scrap content. In particular, the CO² regulations in Europe, especially in the steel industry, will probably favour ‘Greensteel’ rather than low-cost production with NPI.
How much lower are the alloying costs when using NPI compared to the use of high-quality nickel?
We have calculated this in a simulation: As the alloy surcharge is calculated on the basis of high-grade nickel, we take this as a reference. Based on the August alloy surcharge (Outokumpu EU flat prod. 1.4301) of 2,122 €/t, an average LME nickel price for 08/2024 of 16,842 $/t and an NPI price of 1013 CNY/mtu, our simulation calculation would result in alloying costs of around 1,640 €/t when using NPI. Our calculation shows that the alloying costs with NPI calculation instead of Class1 nickel would currently be approx. 480 €/t (-22.7%) lower. This is a rough estimate, as in some cases the NPI still has to be refined by the plants in order to be able to process it in the smelters. Furthermore, the NPI price naturally changes with demand. But it shows the order of magnitude of the savings that can be achieved with NPI. Another way of producing stainless steel would be via a high scrap content process. Here, too, conditions such as burn-off and energy intensity must be assessed according to the situation. Our calculations have roughly resulted in alloying costs similar to those of NPI.
Conclusion:
Depending on the price level and situation, the production of semi-finished products with NPI or high scrap content is more favourable than production with class 1 nickel (and ferrochrome and ferromolybdenum). There are also country-specific factors that can influence the overall price of a product. These include, above all, low energy and labour costs, government subsidies and low corporate taxes. However, these factors have no influence on the alloy surcharge, but are reflected in the base or processing price. It goes with saying that manufacturers in Europe who do not use an NPI in their production process cannot take this into account in the alloy surcharge. Should this change in the long term, a change to the alloy surcharges calculation system would be conceivable. However, due to the increasing dynamics in the production of CO²-reduced steels in Europe as a result of CO² regulations, the introduction of CBAM or similar mechanisms , we assume that the manufacture of products with NPI in its current form will not have a future in Europe in the long term.
It is clear that the alloy surcharge is a useful and important pricing instrument and is also desired by the majority of market participants, as it creates price transparency. That is why the alloy surcharge remains important and will of course retain its significance!!
