Steel Buyers Basics: Index Based Negotiations

Many, perhaps most, steel buyers negotiate a new price for flat rolled steel each time they place a purchase order.  Other buyers will negotiate a price for all their steel needs over a fixed period (as much as a year) and then, when they require steel, release purchase orders at this fixed price.  However, there’s another set of buyers that don’t want to negotiate steel prices each time they place a purchase order but do want to have a price that is reflective of the current market.  These buyers will negotiate an “index deal” with their suppliers.

Index deals are the usual practice for non-steel metals.  For instance, an aluminum coil buyer will negotiate a long-term fabrication-only price with his supplier.  Then, as the buyer places each purchase order, the total price of the metal is the fabrication price plus the current aluminum ingot market price.  The ingot market price is set by an open commodity auction.