What is surcharge, how it is calculated, and what determines its direction?
The following explanation is an attempt to answer these questions.
Please contact our sales department with any additional questions.
- The Base Year.
- Melt Charge Cost and Composition.
- Product Yield.
- Environmental Requirements and Costs.
- a.Pollution Control Equipment.
- b.Disposal Costs.
- Energy Requirements and Costs.
- a.Conversion Fuel.
- b.Cap and Trade.
The Base Year
Is the last year in which the 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.
Melt Charge Cost and Composition
Cost means that the price of the charge materials (pig iron, 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.
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 with product design being the most significant, which in turn impacts shrinkage, gating and risering, cores, etc.
Environmental Requirements and Costs
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.
Energy Requirements and Costs
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.
1. Assume the base melt cost is $.20/lb
2. Assume the overall product yield is 43%
CHARGE COST/COMPOSITION INCREASE $.10/lb.
ENVIRONMENTAL & DISPOSAL INCREASE $.03/lb.
ENERGY COST INCREASE $.04/lb.
Sub Total $.17/lb.
Divided by 43% yield $.3953/lb. surcharge