EBITDA Sensitivity to Extrusion Scrap Spreads and Borrowing Base Ineligibility
Extrusion scrap spread widening shrinks reported EBITDA while expanding inventory borrowing base ineligibility, locking operating liquidity during downturns.
Metal Pass through Clause
Meaning
Supply agreements in raw material intensive manufacturing often use adjustment mechanisms to shift the risk of commodity price volatility from the producer to the buyer. This specific contractual provision, widely referred to as a metal pass through clause, allows the final selling price of manufactured goods to adjust automatically based on changes in public metal exchange indexes. The boundary of this mechanism applies exclusively to the raw metal cost component of the product, preventing any adjustments to labor, energy, or overhead charges.
Pricing Formula
Calculating the adjusted price involves referencing a specific public benchmark such as the London Metal Exchange index at predetermined dates. The formula combines this base metal rate with the manufacturer’s conversion premium to determine the final invoice value. This automatic adjustment occurs monthly or quarterly depending on the volatility of the material.
Risk Allocation
Metal price fluctuations can jeopardize the financial stability of a fabricator operating on narrow conversion margins. By establishing this clause, the fabricator secures a stable margin while the customer assumes the market risk of the raw material. This arrangement prevents the fabricator from having to purchase expensive hedges on the open market.
Contractual Boundary
Agreements must specify the exact baseline indices and the frequency of pricing updates to prevent billing disputes. If the index used is not closely correlated with the actual raw material sourced, the resulting mismatch can lead to unexpected cost exposure. A clear and mutual agreement on these variables represents a necessity for long term commercial partnership.