Flack Global Metals has seen a “tremendous” spike in its hedging business so far this year thanks to intense pricing volatility in the steel supply chain, particularly in light of recent Section 232 developments in the United States, according to two company executives.
The Cleveland-based service center offers fixed prices to its customers primarily via steel, scrap and aluminium futures, chief executive officer Jeremy K. Flack and director of risk management David Feldstein told American Metal Market.
The company's clients are mostly original equipment manufacturers (OEMs) and smaller companies in the metal building, transportation, infrastructure, distribution, energy and construction industries, Flack said, noting that Flack Global Metals manages its customers’ pricing risks on their behalf as a value-added service, which is especially helpful for companies that aren't especially familiar with hedging.
“We have already booked more than 50% more [hedging] business [in tons] in 2018 than we did in 2017 combined, and it’s only March,” Feldstein said. “There has been a palatable amount of interest in this space.”
The customers that used hedging to lock in hot-rolled coil prices in the low $600-per-ton ($30-per-hundredweight) range for the entirety of 2018 are “very happy customers,” he said, adding that they are now protected against current market dynamics.
Indeed, hot-rolled coil prices currently stand at $40.03 per cwt ($800.60 per ton), according to American Metal Market’s latest assessment, and industry analysts have said that they could soar to $1,000 per ton following the implementation of Section 232 tariffs.
Section 232 should be the “wakeup call” for the ferrous industry to start paying attention to futures markets, Feldstein said.
“The horse is out of the barn,” he said. “You don’t buy earthquake insurance after the earthquake hits. Now the earthquake hit [and] ... a lot of people out there don’t have that insurance. Now it’s too late.”
Some companies believe that futures and hedging is “some magic behind the door” that they can’t quite grasp, but Flack Global Metals advises its clients to start small, with trivial volumes, Flack said.
“We’re not selling futures, we’re selling metal,” he said. “We’re doing the same thing, the only difference is we’re delivering it later in the year. It just makes good business sense.”
Flack Global Metals manages its own pricing risks in addition to those of its customers, Flack added. “We hedge our inventory... We practice what we preach.”
Ferrous futures logged strong activity in the US in early March. Volumes for CME Group’s Midwest No. 1 busheling ferrous scrap futures contract reached 360 lots (7,200 gross tons) through March 7, and the exchange's Midwest hot-rolled coil contract posted 3,751 lots (75,020 tons), according to American Metal Market’s calculations.