Steel price indexes like CRU, AMM, and Platts have become indispensable tools for procurement professionals. They provide transparent benchmarks and help track market trends for flat-rolled products like hot-rolled coil (HRC) and cold-rolled coil (CRC). But while indexes simplify pricing discussions, relying on them exclusively can be risky for Senior Buyers at steel service centers.
Here’s a pragmatic look at when buying steel on index works—and when it doesn’t.
When Buying on Index Works
Transparent Benchmarking
Indexes provide a market reference that is difficult to dispute. When your contract price is tied to a widely accepted index, it eliminates ambiguity and gives both buyer and mill a clear pricing framework.
Market-Aligned Pricing
For large-volume purchases where you negotiate index-based contracts with monthly or quarterly price adjustments, buying on index ensures your cost closely follows market realities. This reduces the risk of overpaying in a declining market or missing out on price reductions.
Hedging Against Volatility
Index pricing allows buyers to hedge risk through forward contracts or price collars linked to the index. This structure can stabilize margins and cash flow in turbulent markets.
Facilitating Import and Export Transactions
Index pricing eases cross-border transactions, especially when duties, tariffs, and freight charges affect landed costs. It provides a common currency for price adjustments.
When Buying on Index Doesn’t Work
Lagging Price Discovery
Indexes reflect past transactions, often a week or more behind real-time quotes. If you rely solely on indexes, you risk being slow to react to sudden market spikes or dips.
Limited Spec Granularity
Indexes track broad product categories but don’t reflect niche specs or regional price variations. If you need specialty grades or regional sourcing, index pricing may misrepresent your actual costs.
Ignoring Freight and Surcharge Complexity
Steel prices on index exclude freight, fuel surcharges, and tariffs, which can be significant and volatile. A low index price doesn’t always translate to a low landed cost.
Short-Term Spot Market Dynamics
In tight supply periods, mills may quote premiums above index for guaranteed allocation or faster delivery. Index pricing may not capture these premiums, leading to supply risks if you’re rigid on index terms.
Tips for Senior Buyers Using Index Pricing
Combine index tracking with supplier quotes to capture real-time pricing trends and surcharges.
Negotiate clear terms for freight and surcharges outside the index to avoid surprises.
Use index pricing for base coil but build flexibility for specialty or rush orders priced differently.
Track historical index vs. actual purchase prices to identify premiums or discounts and adjust strategy accordingly.
The bottom line
Indexes are invaluable pricing tools, but smart buyers use them as one part of a broader pricing and sourcing strategy. By understanding the limits and strengths of index pricing, Senior Buyers can leverage indexes to gain transparency and market alignment while safeguarding against lagging signals and hidden costs.
