| Steel Hedging Create Price Certainty By Hedging Your SteelSteel market prices can directly impact your revenue. Our tailored hedge strategies, execution expertise, and commodity management software empower hot-rolled coil steel processors to confidently manage price volatility.Let's Chat | |
| | Dive Deeper: Steel MarketA closer look into understanding the impact of steel on infrastructure and the global economy. |
What is Hedging?A hedging transaction is a strategic action that companies use to reduce the risk of losing money through the fluctuations of volatile commodity prices. With hedging, you're able to create cash flow certainty, establish a known cost structure, maintain or enhance your company’s competitiveness within the industry, and focus on what your business does best. |
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Why Hedge?Given the nature of steel market volatility, companies involved in the supply chain (upstream, midstream, and downstream) of ferrous or non-ferrous products regularly face price risks on input costs and other manufacturing and distribution risks. While inefficient floating supplier contracts have been used to hedge some of these risks, manufacturers are increasingly turning to more flexible financial hedges to manage their exposures.* Financial hedges allow steel companies along the entire supply chain to protect profit margins and minimize risk.Market participants such as steel mills, service centers, and manufacturers can mitigate their risks and protect their margins by hedging with financial contracts. Hedging with derivative tools, the service center and processor can deliver steel to OEMs at a forward agreed-upon price while protecting themselves from unknown pricing fluctuations.Speculation vs. HedgingSpeculation involves the practice of trying to profit from price changes in various markets. “Risk Takers”Hedging involves the practice of mitigating or minimizing the probability of loss from changes in price. “Risk Averse”A hedger starts with price exposure, buys or sells a futures contract, and offsets the price exposure.For example, a steel mill is offered a fixed price in a forward month and buys futures in the same month to offset the price risk. A hedger always does the EQUAL AND OPPOSITE of their physical exposure.A speculator— running a scrap yard or a mill. When they have price exposure beyond their normal course of business and do NOT hedge. |
Benefits of Financial HedgingFinancial hedging involves strategic actions used by a company to reduce the risk of losing money through the fluctuations of commodity prices. While physical hedging, often known as 'back-to-back' pricing, is the pricing of bought or sold physical material to match the pricing of future production and sales. |
Financial HedgingThe company can distribute credit risk across multiple financial counterparties (banks). Using financial derivatives for the objective of minimizing risk in the physical market. Uses CME and LME exchanges (products: HRC, BUS, HDG, EHR). Hedges are negotiated and executed in regulated derivatives markets—resulting in clear execution tied to exchange pricing and reduced price slippage*. The company has assets that offer the portability and flexibility to unwind if market circumstances change materially. | Physical HedgingThe company is subject to single-supplier credit risk. Suppliers are “laying off” risk after fixed-price negotiations—resulting in opaque pricing and increased hedge execution fees. The company is subject to take-or-pay agreements that require specified volumes and time periods. Hedges may need to be product, size, and supplier-specific. |
