New benchmark system, part 2

The benchmark system for ferroalloys drew a great deal of interest since it was announced late last week. The system of accounting for the discounts of the index prices in the benchmark and the introduction of a premium structure instead of discounting had the most impact. However, both shouldn’t come as a surprise.

The LME is a base price on which users add a premium. While a discount to the LME price is not unheard of, re nickel in recent years, for the most part, users have to add a premium to the LME to get metal.

As for the premium, it’s easier for users and analysts to know the underlying price rather than trying to figure out what the “real” price is after all the discounts are figured in. In the case of 4% carbon, high-carbon ferrochrome suppliers can better make their argument that they are selling a premium material.

It’s really simple math, for the four ferroalloys for the initial benchmark, the amount sold on indexes range from abut 70% to 90%, and all with varying discounts. The amount of fixed price determining the index is a fraction, a VERY small fraction, of the total amount sold on the index price. So, a buyer and seller would be confronted with a minor transaction determining the price for a large quantity. And, since the indexes are so thin on fixed price sales, being honest is a liability. Can anyone really justify ignoring the vast majority of business?

For example in 4% C ferrochrome, the current discounts range from around 10% to over 25% for multiple year deals while the amount sold on fixed prices are probably no more than 5% of all the tonnage sold.

While the benchmark system isn’t prefect, it hopefully gives a better indicator what the “real” price is. The best system would be for a majority of the sales to be done on fixed prices in an open and free environment.

Already, Ferroglobe announced that it is trying to make about 50% of its silicon metal sales on a fixed price and would no longer give discounts to the index. Whether that is successful still have to be played out, but it’s a start. Theoretically, those fixed price sales should be reflected in the index!

Still be to discussed are what’s next, surcharges and gaming the system.

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