Designing Commodity Indexation Formulas in Long Term Procurement Agreements
Effective commodity indexation aligns pass-through formulas with physical yield losses, explicit lag windows, and clear benchmark fallback mechanisms.
Melt Loss Multiplier
Meaning
Efficiency ratios adjust the base cost of raw metal to compensate for the weight lost during the smelting process. This factor, known as a melt loss multiplier, ensures the purchaser pays for the final usable volume rather than the gross input weight. It accounts for the chemical and physical changes that occur when solid alloys are converted to a liquid state.
Waste Compensation
Industrial manufacturers apply a melt loss multiplier to the purchase price of raw alloys to ensure they recover the cost of vanished material. Oxidation and dross removal reduce the usable volume of metal. This multiplier ensures the buyer pays for the final weight received plus the cost of the lost fraction.
Yield Calculation
Efficiency levels vary depending on the grade of the input and the technology of the furnace. The melt loss multiplier reflects these technical realities by increasing the base price by a percentage that corresponds to the expected yield. If the furnace achieves a ninety percent yield, the factor increases the price to cover the ten percent deficit.
Margin Protection
Suppliers would lose money if they sold finished goods based purely on the raw weight of the inputs. The melt loss multiplier bridges the gap between input cost and output value. It stabilizes the economics of the foundry.