NEW ORLEANS A growing
number of steel companies have turned to derivatives in an
attempt to manage risk in a volatile and uncertain market, even
as others remain hesitant to embrace the new tools.
"The price of steel can cause a
lot of risk, heartburn and headache," Rick Dougherty, vice
president of sales and marketing at Cargill Ferrous
International, said during the Critical Commodities Conference
sponsored by the Port of New Orleans. "In todays volatile
worldbe it commodities, ocean transportation,
logisticsits important to be able to manage some of
Futures and derivatives have
been available to the U.S. steel market for years, with CME
Group Inc. launching its hot-rolled coil futures contract and
the London Metal Exchange launching its global billet contract
in 2008. Nonetheless, industry players, particularly mills,
have been slow to accept the concept, and as a result growth of
the contracts has been modest.
However, supporters maintain the
contracts have a place, especially as continued volatility in
the steel markets remains a concern.
"Wed like to think that
this is a short-lived volatile environment, (but) my money is
on that its not," said Tony Ankar, director of risk
management at Birmingham, Ala.-based ONeal Industries
Inc. "Thats why I believe risk management has become a
core function of our business. Its not a silver bullet,
but weve got to have the perspective and start to look at
the environment and the horizon to anticipate these types of
Ankar said that the service
center chain first participated in derivatives after the
financial collapse in 2008. "We cried uncle in 2008 because we
realized that the volatility was enough to put us out of
business," he said. "We felt that the mini-cycles were here to
stay. Lo and behold, were seeing them now."
But for the contracts to really
catch on, it will require the support of players up and down
the supply chain, conference panelists said, citing a need for
"Steel will liquefy at some
point. Its a massive industry, and its the largest
contract the LME has from a production standpoint," said
Michael Whelan, vice president of warehousing company Metro
International Trade Services LLC. "The aluminum contract took
10 years to launch, so steel is fairly new."
Not everyone is a likely
candidate to participate in derivatives, however. Dougherty
said likely candidates include those who want to price their
products into the future to build pipelines or other large
projects, like large automotive companies or OEMs, while
end-users with short lead times and little inventory may not
see the benefit of derivatives.
However, he noted that the
increasing appetite for steel derivatives is nonetheless
"Were seeing a number of
different players increasingly join the exchanges," Dougherty
said. "We get calls from every steel mill in the U.S. wanting
to learn about derivatives. They want to know who is using it
and why, and customers need price certainty in the future."