Pricey Steel Price Surcharges

The rising cost of iron ore and energy is causing deep tension between steel makers and manufacturers, as rising surcharges are being tacked on to each ton of steel, Supply Chain Digest reports.  In some cases manufacturers are unaware that their price was not already locked in by their contracts.

Many contracts for steel are written committing the seller to a given “base” price the article said, but with latitude for steel companies to add certain adjustments or surcharges.  Rarely in the past have buyers paid above the base price, but now virtually all steel producers are adding on a variety of surcharges.

ArcelorMittal, US Steel, WCI Steel, and AK Steel have all announced they will be using surcharges.  AK Steel, has recently told their customers that an $820 per-ton surcharge will be added to invoices for electrical steel products shipped in July to cover prices for raw materials and energy.  (In January, the surcharge was only $265 per ton.)

Of course supply and demand is a key underlying force.  Overall global demand for steel has kept capacity tight, giving steel makers more confidence in making price increases stick.  The increasing consolidation in the industry also means fewer companies have control of the supply side of the steel equation.

For manufacturers entering the contract negotiating period for steel, the article says it might be good to insist on locking in a final price in new contracts, rather than a base price, as is found in most contracts today.  However that strategy could also backfire if energy prices pull back, as many expect, or the iron ore bubble pops, buyers might wish they were back to a base price model, as surcharges would drop dramatically, offering a total price that might be well below contracted final prices.

Experts agree, saying the price of steel will continue to increase.  Steel industry consultant Michael Locker, said prices for hot- rolled coil may go up $1,500 per ton from the current $1,100 to $1,200 level.