Hedge funds which play the commodities markets may be profiting from this month's record nickel prices, but firms that use nickel-bearing stainless steels are facing soaring costs.
The problem for stainless users is that once they include it in a product design, it's very difficult to replace it with a cheaper material.
Firms like Arcelor, ThyssenKrupp and Outokumpu, which buy nickel to make stainless steel, pass that cost customers via a device called the alloy surcharge. This has more than doubled in the past two years.
"We're seeing people hurting as a result of the surcharge, but not re-specifying," said Cyril Sparrow, marketing director at Cashmores, the UK's leading independent stainless steel processor and distributor.
"People who specify stainless steel (in a product design) have very specific design, operational and life-cycle criteria that have brought them to specify stainless steel, and it is often difficult to get an alternative performing metal."
Even if alloy surcharges rise further, demand for stainless - used in everything from teaspoons to oil pipes - will not easily be driven away. "People recognise that surcharges are at historic highs, but they understand the reasons. If they could find an alternative material they would, but it's not an easy process," said Sparrow.
"People don't specify stainless steel on a whim. Even if they specify it for aesthetic reasons, it's not very easy to say 'I don't like the price of stainless this month so I'm going to use something different'."
The higher the nickel content, the more expensive the steel.
Surcharges for 332 grade stainless, a high-nickel steel used in superheated steam piping in power plants, were raised 34 percent to $8,264 a tonne from August to September this year, compared with $4,112 in September 2004, according to figures from broker Sempra Metals.
"It is little wonder the major energy and bulk chemicals firms complain that project costs are soaring and eating up a large proportion of their capital budget even as they reap record selling prices," said John Kemp, Sempra's metals analyst. Despite the high surcharges, buyers are queuing up, said Eero Mustala, senior vice president at Finnish stainless producer Outokumpu.
"Demand for stainless steel has been very good, mainly due to good end-user demand and to some extent restocking. This was expected after the dismal last half of 2005," he told Reuters.
The likelihood is surcharges will rise further before the end of the year. Surcharges are normally applied with a three-month delay, so this month's record nickel price of $29,200 per tonne on the London Metal Exchange will not be felt until November.
Cashmores estimated that November's surcharge for grade 304 stainless, the most widely used, will be 1,314 pounds ($2,491) per tonne in Britain, more than double the figure for November 2005.
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