The use of formula contracts in the silicon market is bound to trigger a heated argument. Some suppliers, led by Globe Specialty Metals, have made known their distaste for the contracts. _They say a few secondary aluminum producers have pushed down the price using small monthly spot fixed-price purchases. Those purchases, according to the suppliers, distort the market, especially considering the formula contacts often contain a discount off the low. “If the low end of the range of an index is $1.15 per lb, the real price to consumers is between $1.10 and $1.14, depending on the seller and the contract,” one analyst pointed out.
Sellers want to switch to fixed-priced agreements in 2014, but this might be wishful thinking. No consumer is willing to buy at a fixed price for a year, and even quarterly fixed pricing poses problems. While the silicon market isn’t dynamic, no buyer wants to be caught paying more than his competitors.
Monthly and quarterly fixed-priced businesses have drawbacks. The major advantage of a formula contract is that it binds the buyer and the seller together for a prolonged period. If the sales were done solely on a monthly or quarterly basis, there would be no loyalty and the consumers would opt for the lowest price. “In an oversupplied market, like we have today in the US, there would be lots of suppliers competing,” one seller pointed out.
A consumer added: “We have no problem getting suppliers. I don’t see why the sellers are now complaining. When prices were shooting up, the suppliers had no problem with formula contracts, but now they do when they are disadvantaged by the contracts.”
The issue will be decided when the two sides negotiate their 2014 supply contracts. If competition is the deciding factor, the formula contracts with discounts, possibly smaller than in 2013, will prevail.