The Benefits of Hedging Steel Price Risk

Prior to 2004, steel users locked down their steel costs, either directly or indirectly, through long-term pricing agreements with steel mills.

Because China’s enormous increase in consumption drove costs ever higher, U.S. mills began adding surcharges to their contract prices in 2004. This caused enormous cost overruns for steel users committed to providing a fixed price product to their customers. Steel consolidation has given the mills the ability to say that they will no longer bear the risk of long term price agreements without a built in adjustment for cost fluctuations.

The net result has been to leave steel users without a viable means to fix total steel costs for extended periods. Steel hedging provides steel users the ability to offer fixed-price contracts to their customers without exposing themselves to the risk of market fluctuations. Today this is accomplished through the use of over-the-counter price swaps, and in the future it may be accomplished through the use of steel futures traded on a U.S. commodity exchange.  FCStone is positioning itself to be the brokerage firm of choice for steel users seeking to use these tools to protect their bottom line from risk.