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Increased hedging helps Worthington mitigate risk

Keywords: Tags  Worthington Industries, long-term, contracts, hedging, Spartan Steel Coating, Severstal North America, ThyssenKrupp, Tailor Welded Blanks John McConnell

CHICAGO — Worthington Industries Inc. is managing steel spot market risk by securing long-term supply contracts with customers, performing more value-added services and hedging steel futures more proficiently, executives said during a quarterly conference call with analysts.

"The economy is on somewhat more solid ground than the suspended uncertainty (of) last quarter," chairman and chief executive officer John McConnell said, adding that he expects many segments of the economy to grow moderately this year. "The election is behind us ... and some action has been taken towards resolving our debt crisis."

Worthington kept inventories tight in the latter part of 2012. Days’ supply is "running in the low 60s—even less when you exclude some of the forward buy activity," vice president and chief financial officer Andy Rose said.

Worthington does "a lot more hedging than (it) used to do," president and chief executive officer Mark Russell said. "Most of our business is contract and most of that is on fixed price ... and (hedging helps) mitigate that."

Because of its experience with hedging and forward contracts, Columbus, Ohio-based Worthington has found more counterparties willing to enter such contracts. "I’d say the growth is exponential," Russell said. Worthington isn’t "at critical mass yet, (but) we now have a lot of counterparties and we can give multiple quotes and the spreads are tighter, so it’s getting much more useful."

The company’s focus on value-added services is preserving and improving margins, the executives said. For example, it does not perform much straight slitting on a stand-alone basis any more. "It’s almost always in conjunction with another value-added process," Russell said. "If we’re going to slit it, we are also going to pickle it, galvanize it, cold-roll it, so we have a lot more value-add than we used to in our portfolio and the amount of commoditized business is reduced."

However, Worthington is facing challenges with some joint ventures it owns with steelmakers. One example is Spartan Steel Coating, a joint venture with Severstal North America in Monroe, Mich. Last year, Severstal built an in-house galvanizing line in Dearborn, Mich., where it is headquartered. "They (Severstal) are going to prefer (to use) that (Dearborn) whenever they can. Right now, there’s not enough volume to fill both of them up," McConnell said. "But it’s a situation that can be addressed; it’s temporary" because Spartan will solicit new business elsewhere.

In addition, Southfield, Mich.-based ThyssenKrupp Steel North America Inc. has put its share of Monroe, Mich.-based Tailor Welded Blanks Co. LLC on the sale block. "That obviously affects us, because we’re their partner," McConnell said. Worthington doesn’t have the right of first refusal to purchase the remaining stake.

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