Steel Market Update indexes hot rolled, cold rolled, galvanized and Galvalume steel coils on a weekly basis. Today we want to spend a little time explaining the nuances to steel mill pricingand the differences between indexed, base price and transaction prices.

Since we have service centers, mills, trading companies, wholesalers, toll processing companies, paint companies, financial analysts and hedge fund managers as well as private investors and just plain old interested parties reading our newsletter it behooves us to go through some of the basics from time to time. At least how we perceive and are reporting those basics.

Indexes – Hot Roll, Cold Roll, Galvanized & Galvalume

First – Steel Market Update keeps track of four core flat rolled steel products – hot roll (HR or Hot Rolled), cold roll (CR or Cold Rolled), galvanized (GI or Galv with GA being galvanneal) and Galvalume (GL or Glume). Galvalume, by the way, is a trademark name originally developed by Bethlehem Steel.

Hot Rolled – all of the indexes use base gauge (no extras need to be applied to get to transaction cost) thickness and width in order to calculate our range and all indexes.

Cold Rolled – as with HR above – all indexes use base gauge (no extras need to be applied to get to transaction cost) thickness and width in order to calculate our range and all indexes.

Galvanized – SMU, CRU, The Steel Index all use .060” G90 as the benchmark for the per ton price shown in our indexes. SMU also uses the base price and references base pricing on our website and in our newsletter. More about base prices shortly.

Galvalume – SMU uses .0142” X 40.875” Grade 80, AZ50 GL coils as our benchmark to provide the per ton examples shown in our range and index. We also present the base price range being used in order to calculate the ranges shown on our website and in our newsletter.

What comes first – the chicken or the index…?

On Wednesday of every week Steel Market Update publishes our steel price indexes (which can also be found on our website). Many of our readers are very interested in our indexes – especially in that we publish a range of pricing to account for variations in pricing from mill to mill as well as from customer to customers as there really is no such thing as “one” price fits all customers.

Here at Steel Market Update we review prices from a number of different perspectives in order to speak to those we serve in the steel community. SMU produces a range of prices on each product – hot roll, cold roll, galvanized and Galvalume – from low to high and our “index” is the average of the two.

Our experience while selling steel for a steel mill as well as for trading companies is not all customers are created equal. Due to size, location, the ease (or difficulty) of the item being purchased, the ability of taking product of a slab or heat, mill lead times, customer payment history, claims history and the ability of the purchasing manager (and vice versa on the mill side of the ledger) to negotiate will determine the ultimate price to be paid for a particular product from a domestic (or foreign) mill.

The result is we find a range of prices being available at any one time in the market. SMU attempts to capture the lows and highs which encompasses 80% or more of those who are spot buying steel from the North American mills (mostly USA and Canada). We understand there are special freight circumstances, large tonnage arrangements and long-term business relationships which impact the lower (and the higher) end of the range. We want to present numbers where just about all of our readers can spot buy material – large and small alike. So, yes – we do throw out some of the lower numbers – and yes, - we do throw out some of the higher numbers – in order to come up with a consensus.

Our index is an average of the high and the low. Other indexes (or indices if you prefer) are based on formulas which might weigh averages based on a number of criteria – but basically they too are coming up with a number somewhere between the high and low of the numbers they have collected.

A little while back one of our readers who happens to be a large service center sent us an email regarding the way we present our pricing numbers:

“Maybe a way to look at the recent topic of what price info you share, is from the perspective of relevancy to your audience. The highest price in the market for ultra short delivery, probably isn't relevant. Nor would be the lowest net fob mill price - when the buyer doesn't report that it is freight competition that makes the Algoma or AK net fob mill seem like a new low in the market. You are the gatekeeper of relevancy; grossing up or netting down transactions to filter out outlier behaviors.

Your current style of applying business logic to the price range is working for your audience. Readers, both sellers and buyers, should be appreciative for your insight on the hierarchy of economic efficiency in steel transactions; with heat lots of width being the most efficient for mills, and product of full coil orders being most efficient for distributors/processors. Educating both producers and users about the factors that hold real value in a largely commodity product will be worthwhile and profitable for both. Sellers can't hide from price transparency, nor can buyers ignore that item buying behaviors matter.”

It starts with Base Prices…

We are thinking about re-organizing how we present our numbers to our readers. The majority of our members are actively involved in buying and selling steel and tend to work on hundred weight (cwt) pricing as opposed to dollars per short ton (or metric ton). Very few actually purchase the benchmark items which are referenced – especially coated products where it has become the custom to quote .060” G90 (or AMM .0397” G90) and where we use .0142” AZ50 Grade 80 as our benchmark for Galvalume.

The way steel is sold by the domestic mills in North America is to reference a base price and then calculate the extras needed to come to the “transaction” price – the final price the customer pays for their steel.

Since all of the companies indexing hot rolled and cold rolled are using “base gauge” which don’t require extras we are, in effect, indicating the average base price being offered for those products. Our current hot rolled index is $715 per ton – this equates to a $35.75/cwt base price (divide the per ton price by 20 – as there are 20 hundred weights in a ton – in order to get your cwt base price). Our $800 per ton cold rolled index equals a $40.00/cwt base price.

For galvanized and Galvalume – what Steel Market Update does is first discovers where the base prices are and then we add the extras in order to obtain our benchmark index numbers. In reality customers buy utilizing a base price and then adding the extras for whatever item they are purchasing in order to determine their final transaction price.

So, it is the base price which begins the pricing process.

It ends with Transaction pricing….

The financial community, steel analysts and non-steel-buying members only care about the index numbers - or the averages of base metal pricing – rather than transaction prices – the prices actual being paid by the customers of the domestic steel industry.

Transaction prices begin with the base prices and include all applicable extras for quality, surface treatments, chemistries, testing, thickness and width and specific coating extras (zinc , zinc/aluminum, etc.). Besides the extras listed above transaction prices may also include freight costs to the end user location.

At various times during economic cycles the transaction prices can be impacted – sometimes significantly – by adjustments or specific negotiations on the extras and freight required to get to the final transaction prices. There are situations in the existing market where coating extras for galvanized and Galvalume may vary from mill to mill.

Steel Market Update understands the negotiating process and the nuances which exist in the steel market. We continue to encourage those buying and selling steel products to not lose sight of the entire pricing process and not be lulled to sleep when it comes to understanding final transaction pricing. Indexes like those produced by SMU are for information and trend purposes. Exact transaction pricing is between the customer and their supplier.

For those who are buying from service centers and not from mills….

For those who are buying from service centers or wholesalers – it is important for you to understand what pricing pressure your supplier is receiving from the producing mills. SMU understands prices being quoted in the market at any point in time may not necessarily represent total replacement costs plus normal margins. If, however, you understand trends, the size of increases and outside factors which can impact pricing (such as foreign steel, scrap, iron ore, zinc and aluminum, etc.). SMU feels by watching our information on a weekly basis those buying from service centers will be better informed as to what to expect out of your suppliers (and where and when you should be negotiating with your suppliers).

Note to those reading SMU for the first time...

Each and every week we dedicate part of our newsletter to try to explain why steel prices are reacting the way they are. We look at different markets as not all are responding the same way to our economic recovery and we discuss international markets and how they impact North American prices.

You are welcome to sign up for a free 4-week free trial on our website - www.steelmarketupdate.com - all information collected during the registration process is not shared with any other company and helps us understand more about our readers and their need to learn more about the flat rolled steel business.