NEW YORK While end-users have been the early adopters of steel futures, mills also are starting to experiment with the instruments, according to executives at the Steel Success Strategies XXVIII conference in New York sponsored by AMM and Englewood Cliffs, N.J.-based World Steel Dynamics Inc. (WSD).
"The producers, as they run their tests on futures, will find that (hedging) is not just a consumer opportunity ... but they can use it for themselves to protect against raw material devaluation as well as selling-price devaluation," said Patrick McCormick, president of Englewood Cliffs-based World Steel Exchange Marketing LLC and managing partner at WSD.
The increasing volatility in raw materials and finished product pricing should encourage producers to hedge. "These markets are extremely volatile, and there are many companies, whether its a bank, a trader, a producer or a steel mill, that have to manage risk more carefully," John Banaszkiewicz, managing director of London-based Freight Investor Services Ltd., said.
About 60 percent of the domestic hot-rolled coil market of about 40.5 million tons is being sold on the basis of a floating price, meaning that there "are a lot of people not hedging," Banaszkiewicz said.
Futures trading is growing, with 30,606 hot-rolled coil contracts traded on the Chicago Mercantile Exchange (CME) so far this year compared with 43,867 contracts in all of 2012, according to Martin Evans, director of metal products at Chicago-based CME Group Inc. "That is the result of more market participants coming on board, getting registered and trading," he said.
Mike Frawley, global head of metals for New York-based Jefferies Bache LLC, said that a service center selling 500,000 tons of carbon steel annually could have avoided revenue deterioration of about $25 million, given a $100-per-ton price decline over six months, by hedging.
The adoption of steel futures could follow a path similar to that of aluminum, where initial resistance from producers, especially regarding price transparency, has given way to the ubiquitous use of futures.
"They actually thought they set market pricing in aluminum, and then they came to realize that the market is really setting that price," Jon Putnam, president and chief executive officer of Roswell, Ga.-based Standard Steel Trading Co., said. "I think there are still some steel chief executive officers who think they set a price independent of the marketplace. They are learning that thats not true."
The recent introduction of a scrap futures contract should ease some steel producers concerns about hedging. "They found it difficult to sell forward at fixed pricing for their output as the input cost might move against them and squeeze their margin. We hope weve addressed that with this contract," Evans said.
Offering products relevant to the steel industry as well as adding liquidity by getting the financial industry interested in the market, is "extremely important," Evans said.
Early movers in the futures game are likely to see advantages, McCormick said. "They will be skilled because of their early adoption. They will be able to take advantage of the added liquidity (once more parties enter the market)."