What is the Alloy Surcharge? – Definition and Calculation

Definition

The alloy surcharge (AS) is a surcharge calculated according to the prices of the alloy elements, and is the amount by which the basic price for stainless steel increases.

How is the alloy surcharge calculated?

Here is a step-by-step description of how to calculate the alloy surcharge:

1. Find the raw material price base for the alloy surcharge

Usually, only the main components of the alloy are taken into account. These are ferro-chromium, nickel, molybdenum and scrap in standard rust-, acid- and heat-resistant steels. However, other alloy components, such as copper, titanium or niobium, can also be considered, if used in relevant proportions.

Some manufacturers have recently charged an energy surcharge due to the enormous increase in energy prices. This is either included in the alloy surcharge or charged separately.

The commodity prices used for calculating the alloy surcharge depend on the manufacturer.

The period for calculating the price base is usually one month, calculated from the 21st of second preceding month to the 20th of first preceding month before the month for which the alloy surcharge is calculated.

Example:

At present, hollow steel is still the exception. Here, the alloy surcharge is calculated two months in advance, in some cases also from the 1st of the third preceding month till the end of the second preceding month.
All values of the alloy surcharge price base are initially calculated in US dollars.

2. Deduct a reference value from the determined alloy prices.

A reference value is subtracted from the current average prices of the alloy components. Since the alloy surcharge is historically based on a surcharge for a price difference in a standard product at a certain time in the past (more details under "A look back through history"), the reference values of the alloys are now subtracted from the determined prices.
These reference values are the base prices of the alloy components at a specified date in the past. This means that the alloy surcharge had the value 0 on reference day X in the past. The reference values are not published and are therefore not known.

3. Convert into the target currency

After deducting the reference values, the obtained average base values are now converted into the target currency, e.g. euro. Therefore, the alloy surcharge also includes the current exchange rate.

4. Multiply and add up the calculated base values by the share of alloy in the material

The alloy surcharge is the weighted average price of all the alloys included in a material. This means we multiply the share of an alloy included in a material by the calculated price of the alloy and add up the numbers for each component.

Example for chrome:

The price of chrome as a share of the total alloy surcharge is the difference between the base price of chrome and the chrome reference value, divided by the USD/EUR exchange rate and then multiplied by the share of chrome contained in the material.

5. Calculate the alloy surcharge for different product groups

The alloy surcharge is not calculated the same for all product groups. Manufacturers use adjustment factors to allow for additional scrap caused by varying numbers of production steps.
For example, in the case of welded tube, which is produced from flat steel, the additional steps of cutting and welding add 15% to the flat products surcharge.

The adjustment factors generally depend on how much processing a product requires.
In addition to welded tube, products that usually have adjustment factors are seamless tube, wire rod, ingots/billets or precision steel.

If the current calculated average value of an alloy is lower than its reference value, meaning the above formula results in a negative number, its share in the alloy surcharge is zero. So there are no negative alloy surcharges.

Final Note

Since the alloy surcharge is a price component, it is supervised by antitrust authorities, which prohibit any price fixing, thereby preventing any standardization of alloy surcharges.

Even if many would prefer a uniform, easy-to-understand alloy surcharge, we expect manufacturers to raise the number of their own alloy surcharges in the future, which will make it even harder to compare prices.

However, you can rest assured that we at LZ-prognose.de will continue to offer forecasts of all the comment manufacturer alloy surcharges.

Looking for more info on the history and origin of the alloy surcharge?
Then please read the article further below.

Can we now calculate the alloy surcharge ourselves?

In principle, yes, at least approximately.

How much time and effort does this take up?

A great deal!
We must ascertain the individual, unknown components for each respective manufacturer, such as for example the reference values, basic raw material price and occasionally also weighting for alloys as accurately as possible. This requires many years of experience and background knowledge.

Are there any reliable forecasts for alloy surcharges?

Fortunately, yes.

LZ-prognose.de has brought their knowledge to bear and with a great deal of time and effort can very accurately reconstruct the calculation of alloy surcharges for all major manufacturers in Europe and North America.

In this way, with the help of our raw materials expertise we are able to prepare very accurate individual forecasts of the constituent alloy parts and so of the overall alloy surcharge of each material (at present over 2,000 individual prognoses).

Our unerring precision at the same time sets benchmarks: Lying at over 97%, 4 weeks prior to the publication of alloy surcharges.
You can find a graphic assessment of the last 2 years and further details under accuracy.

Has this perked your interest? Try us for 6 weeks, free of charge and with no strings attached!

Register here and put us to the test. You can already find out what the forecast for next month’s alloy surcharge is to-day.
The trial period is free of charge and ends automatically. Terminating it is not necessary.

Registration for a free and non-binding 6-week-trial

Do you actually know why alloy surcharges exist, and who sets them?

A look back through history.

All stainless steels have a high proportion of high-quality alloy parts such as for example ferrochrome, nickel and molybdenum, which have high prices compared to the basic steel material.

In fact these alloy components were very cheap at that time and were not very volatile from to-day’s point of view, but by 1988 this had already led to customary overall prices of stainless steel products needing to be adjusted frequently throughout the year. In order to prevent these repeated new pricing agreements, some manufacturers formed a second pricing component, only dependent on the alloy component parts.

This was supposed to comprise the price variations for alloy parts with regard to a basic product at the time the calculation commenced. Consequently the method of calculation described above was developed, in which reference values at that time corresponded to existing prices for alloys at the start of the calculation. In this way the alloy surcharge was viewed as being a monthly correction of the basic product on grounds of the changing prices of the alloy parts.

In this way we were able to determine basic prices once and for all and to agree on the alloy surcharge as a variable component of the overall price, which should make up for fluctuations in prices for the individual alloys. In this way new negotiations during the agreed period of validity for prices were no longer necessary.

First of all a calculation period of the previous 3 month was used, which promised to give us good equalisation and in this way no large jumps in the alloy surcharge.

But then nickel, one of the most important component alloy parts to become a sought after speculation object on the LME (London Metal Exchange), and its prices started to adopt irrational courses. The price of nickel, which fluctuated comparatively slowly between 4,000 and 10,000 $/t from 1994 to 2003, developed a dynamic from November 2005 (price: 12,000 $/t) which peaked at a historical maximum price of 50,000 $/t only 1 ½ years later in May 2007, but then abruptly crashed to 10,000 $/t (November 2008) in only 1 ½ years. This dynamic with a calculation period of the 3 previous months could no longer be tolerated by manufacturers.

This is why the calculation period was set as the 2 previous months and finally as one month prior. Merely manufacturers of hollow bars and seamless tubes left the calculation period as the last two elapsed months.

A selection of current manufacturers of rust, acid and heat-resistant stainless steels with their individual alloy surcharges:

Germany and EU

Outokumpu: flat products Germany and EU, long products (ingots, wire rod, hot rolled and cold-rolled bars) and precision strip. Alloy Surcharges Outokumpu

Deutsche Edelstahlwerke: long products (ingots, hot rolled and bright bars, wire rod). Only customers are notified of alloy surcharges.

Mannesmann Stainless Tubes GmbH (MST): hollow bars and seamless tubes. Only customers and interested parties are notified of alloy surcharges directly.

Italy

Acciai Speciali Terni: Flat products. Only customers are notified of alloy surcharges.
Cogne Acciai Speciali S.p.A.: Long products (billets, bright bars and hot rolled bars, wire). Alloy Surcharges of Cogne Acciai Speciali S.p.A.

France

Aperam Stainless Europe: Flat products, precision strip. Alloy Surcharge Aperam Stainless Europe

Ugitech SA: Long products (semi-finished products, bright bars and hot rolled bars, wire). Alloy Surcharges Ugitech SA

Spain

Acerinox: Flat products, Long products (bright bars and hot rolled bars, wire rod). Alloy Surcharge Acerinox

TUBACEX S.A.: hot rolled and cold rolled hollow bars. Alloy Surcharge TUBACEX S.A.

Scandinavia

Sandvik Materials Technology: steel bars, hollow bars as well as flat products made of special alloys. Homepage of Sandvik Materials Technology.

North America

ATI: Flat products. Alloy Surcharge ATI

AK Steel: Flat products. Alloy Surcharge AK Steel

North American Stainless (NAS): Flat products, long products (hot rolled bars and bright bars, wire rod). Alloy Surcharge NAS

Outokumpu USA: Flat products, long products (wire rod, bars) and precision strip. Alloy Surcharge Outokumpu USA

As the alloy surcharge is a pricing component, it is subject to monitoring by cartel authorities, who forbid any collusion or price-fixing in this context, and in this way counteract any standardisation of alloy surcharges.

This is why we expect an increase in the number of manufacturer alloy surcharges in future.

You can rest assured that we at LZ-prognose.de will also continue to offer forecasts of all the current manufacturer alloy surcharges.