Key takeaways
- Steel is not one price. Grade, coating, size and region can matter more than the headline index.
- Scrap, hot rolled coil and regional mill assessments are different references and should not be swapped.
- Name the quotational period and the treatment of mill announcements before the first invoice.
- Index the steel content, not the whole piece price, or the supplier loses the incentive to control conversion.
Why steel indexing is harder than aluminium
Aluminium has a deep exchange market and a relatively standard primary product. Steel is more fragmented. A hot rolled coil, a cold rolled sheet, a galvanised sheet, a wire rod and a special bar quality steel are different products with different prices and different supply chains. The headline number on a news site may not describe the steel in your part.
The second difference is the mill structure. Steel prices are often set by mills through published assessments, contract negotiations and announced increases. A mill announcement is not the same as a transaction price. A clause that follows announcements can be gamed or can lag the market for months.
The third difference is the coating and the grade. A galvanised part includes zinc. A stainless part includes nickel and chrome. A spring part may use a specific wire grade with a narrow supply base. The index for the base steel does not capture those extras, so the formula needs a grade and coating layer.
Pick the right reference
Scrap is the most liquid steel-related reference. The London Metal Exchange publishes a steel scrap futures contract, and scrap assessments are used widely in long products and rebar. Scrap is a useful reference for electric arc furnace production and for grades where scrap is the marginal input. It is not a direct proxy for a cold rolled or coated flat product.
Hot rolled coil futures, such as the CME Group US Midwest contract, give a transparent reference for the US flat products market. Regional assessments from specialist price reporting agencies cover HRC, CRC, galvanised, wire rod and bar in Europe, Asia and other markets. A domestic mill price may be the practical reference where imports are limited.
Choose the reference that matches the part and the supplier's buying pattern. If the supplier buys Indian wire rod for a spring, an Indian wire rod assessment is more relevant than a US HRC future. If the supplier buys imported HRC and processes it in Europe, the landed HRC price plus a conversion may be the right basis. The contract should not use a reference that neither party can obtain or verify.
| Reference | What it tracks | Best fit | Limitation |
|---|---|---|---|
| LME steel scrap | Scrap futures, primarily Turkish import scrap | Long products and scrap-based steel | Not a direct flat product price |
| CME US Midwest HRC | US hot rolled coil futures | US flat products | Regional and currency specific |
| Regional HRC assessment | Published transaction range for a region | Imported or domestic flat products | Assessment method and timing vary |
| Wire rod assessment | Published wire rod price by region | Springs, wireforms and fasteners | Grade extras may sit outside the series |
| Mill contract price | Negotiated mill price for a grade | Large volume, direct mill supply | Less transparent and harder to audit |
The clause should name the exact publication and the price definition, not just the product name.
Grade, coating and size extras
A steel quote is built from a base price plus extras. The grade extra covers alloying and heat treatment. The coating extra covers zinc, zinc aluminium, paint or oil. The size extra covers thickness, width and coil weight. The delivery extra covers freight, packaging and cut length. A price clause that indexes only the base leaves these extras to be renegotiated every time the market moves.
Zinc is a commodity in its own right. A galvanised part has a zinc cost that can move independently of the steel. The same applies to nickel and chrome in stainless, and to alloying elements in spring steel. If the coating is a meaningful share of the part, give it its own reference or a periodic review. Do not bury it in a general steel index.
The conversion charge should stay separate. Stamping, forming, welding, machining and plating are labour and energy intensive. They do not become cheaper because the steel index falls. A clause that indexes the whole piece price can increase the supplier's margin when metal rises and squeeze it when metal falls. Neither outcome is a good commercial relationship.
The formula and an illustrative build
A practical formula is: base steel price multiplied by the input weight, plus grade and coating extras, plus the conversion charge, plus freight and packing. Divide by the finished weight or by the number of good parts to get the unit price. State the yield and the scrap credit, because the input weight is not the finished weight.
For illustration only, take a stamped bracket with a finished weight of 1.2 kg, a yield of 78 per cent, a base steel price of 700 pounds per tonne, a grade and coating extra of 180 pounds per tonne, a conversion charge of 1.10 pounds per part and a freight and packing charge of 0.12 pounds per part. The input weight is about 1.54 kg. The steel cost is 1.54 multiplied by 880 pounds per tonne, or about 1.36 pounds. Add conversion and freight for about 2.58 pounds per part before tax.
A mill announcement is not a transaction price
Use a published assessment or an agreed contract price. An announcement is a negotiating position until it is accepted in the market.
The timing trap
Steel contracts often use a quotational period of one month before shipment, the month of shipment or the month of production. The choice matters when the market is moving. If the supplier buys steel two months before delivery and the clause resets on the shipment month, the supplier carries the gap. If the buyer expects the shipment month and the supplier invoices on the purchase month, the invoice looks wrong even when the clause is clear.
Define the period in plain language with a worked example. State the publication date, the averaging method and the treatment of weekends and holidays. State what happens when a shipment splits across two months or when a mill delivers late. State whether the price is fixed at order, at production or at invoice.
Mill surcharges add another timing question. An energy surcharge, a zinc surcharge or a freight surcharge may be announced monthly. The clause should say whether these are included in the base, passed through at cost with evidence, or capped. A surcharge without a cap can remove the benefit of a fixed conversion price.
Hedging and sharing the risk
Steel futures are less liquid than aluminium or copper futures, and the contract may not match the grade or the region. A hedge can still be useful for the base price, but it should be treated as a financial position with its own basis risk. It does not remove the grade, coating or conversion risk.
For most buyers, a shared clause is more practical than a hedge. Set a band where the supplier absorbs a small movement, a middle band where the change is shared, and an upper band where the buyer pays the indexed amount. Add a cap and floor if the budget needs one. The supplier should explain whether the cap is priced into the conversion charge.
The clause checklist
Name the product, the grade, the coating and the size range. Name the index and the publisher. State the price definition and the unit. State the quotational period and the averaging method. State the yield, the scrap credit and the conversion charge. State how grade, coating and freight extras are treated. State the currency and the exchange rate basis.
Add a fallback if the publication is late or discontinued. Add a dispute route and a time limit. Add a review date for the conversion charge. Add a rule for mill surcharges, including the evidence the supplier must provide. Add a rule for a change in the part that affects the steel content.
Keep the invoice simple. Show the index print, the period, the input weight, the extras and the arithmetic. If the buyer cannot reproduce the number, the clause will be a source of friction. A clear one page schedule is worth more than a long legal annex that nobody reads.
- Grade, coating and size range named
- Exact index, publisher and price definition
- Quotational period and averaging method
- Yield, scrap credit and conversion charge
- Surcharge treatment and evidence
- Fallback, dispute route and review date
Frequently asked questions
Should I index steel to scrap or to hot rolled coil?
Use the reference that matches the part and the supplier's buying pattern. Scrap suits scrap-based long products. HRC suits flat products. A coated or alloy part needs a grade and coating layer on top of the base reference.
How do I handle mill surcharges?
State whether they are included in the base, passed through at cost with evidence, or capped. Ask for the mill notice and the calculation. A surcharge without a cap can remove the benefit of a fixed conversion price.
What is the right quotational period?
It depends on when the supplier buys and when the part ships. A period before production protects the supplier; the shipment month shifts the risk to the buyer. Define the rule and give a worked example.
Can I hedge steel with futures?
Some references are hedgeable, but liquidity and grade basis risk vary. A hedge can cover the base price, not the grade, coating or conversion. Many buyers prefer a shared clause with a band and a review date.
Sources and further reading
- London Metal Exchange, Steel scrap futures contract specifications
- CME Group, US Midwest hot rolled coil futures contract specifications
- World Steel Association, Steel statistical yearbook
Qumek Trade Desk
Trade and logistics team
The team that handles Incoterms, customs classification, freight and landed cost for Qumek programmes.
Put a steel quote on a reproducible basis
Send the grade, coating, part weight and current quotation. The trade desk will reply with the reference and period to fix in the clause.
Review the steel clause