Surcharge Mystery
Many people question what a surcharge is, how it is calculated and what determines its direction. In an attempt to answer these questions Unicast has developed the following “Surcharge Primer,” which will take you through the process step by step including an example calculation and our January 4, 2010 imbed calculation, which you can find by Clicking Here. Those steps are:
1. The Base Year.
2. Melt Charge Cost and Composition.
3. Product Yield.
4. Environmental Requirements and Costs.
a. Pollution Control Equipment.
b. Disposal Costs.
5. Energy Requirements and Costs.
a. Conversion Fuel.
b. Cap and Trade.
1. We will begin with the definition of the BASE YEAR. The BASE YEAR is the last year in which the above (charge materials, energy, etc.) are fully incorporated in the base casting price. As commodity prices fluctuate, sometimes wildly, they must be captured and passed along, if not, in short order the supplier is either no longer around or is financially incapable of providing the quality, service and delivery that is required. The other alternative is to reprice the product on a frequent (almost daily) basis, which is unacceptable to both the customer and the supplier, hence a surcharge.
2. Melt charge cost means that the price of the charge materials (pig iron, moly, motor block, steel, etc.) will fluctuate enormously and frequently. Supply considerations, such as the availability of pig iron, may require a significant change in the charge composition to achieve the proper chemistry, which in turn will have a significant impact on charge costs. When the two act in concert the impact on costs will be compounded and must be captured and passed along.
3. Product yield represents the net final product weight divided by the gross amount of material melted to achieve this final product weight. In other words, the amount of material that needs to be melted versus the weight of the final product. The final yield is dependent upon several factors; however, the most significant is the final product design, which in turn impacts shrinkage, gating and risering, cores, etc.
4. There are a number of Federal and State environmental laws that must be complied with that add highly volatile costs to the operation, with the two largest being energy intensive pollution control equipment and the disposal of wastes associated with this equipment, the melt operation and all other manufacturing.
5. It requires a tremendous amount of energy, both electrical and natural gas, to take room temperature material and raise it to approximately 2800 degrees F in order to produce the final product. Electrical energy and transportation fuel are highly surcharged and the price of natural gas is extremely volatile.
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EXAMPLE CALCULATION
Assume the base melt cost is .20$/lb. The melt charge cost and composition result in a cost increase of .10$/lb. Environmental and disposal costs increase by .o3$/lb. and energy costs increase by .o4$/lb. and the overall product yield is 43%.
CHARGE COST INCREASE - .10$/lb.
ENVIRONMENTAL & DISPOSAL INCREASE - .03$/lb.
ENERGY COST INCREASE - .04$/lb.
Sub Total - .17$/lb.
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.17$/lb. / .43 = .3953$/lb. surcharge.
I hope that this will give you a better understanding of what a casting surcharge is, why it exists and how it is calculated.
If you have any questions, please call at your earliest opportunity.
Sincerely,
UNICAST COMPANY
Daniel M. Schultz
President
