The global steel market is the second largest commodity market in the world behind the global energy market. CME Group products allow you to hedge your flat steel and scrap steel exposure across various regions. While flat steel hedging has grown substantially in the US Midwest hot-rolled coil steel market, CME Group also offers an effective mechanism to hedge flat steel in Northern Europe that has quickly been adopted by market participants.
Price fluctuations in the steel market are common and have been difficult to forecast in the past. This can present problems for both sellers and buyers, as projects and profits are tied to steel prices. One way to offset the risk of disadvantageous price movements is through hedging using derivatives, which allows you to protect yourself from unforeseen movements in the market. Derivatives, such as futures contracts, are financial instruments whose prices move in line with the prices of their underlying market.
One such futures contract is Northern European Hot-Rolled Coil Steel futures, which can be a cost-efficient hedging tool to protect profit margins and minimize risk. Producers, service centers, holders of inventory, OEMs, construction firms, pipeline companies, and investors are just some of the potential participants in the Northern European Hot-Rolled Coil Steel futures market.
A hedging example
An original equipment manufacturer (OEM) would like to place an order with a steel service center for 1,000 metric tons of processed steel due in six months and wants to agree on a fixed price for this order today. The steel service center is faced with the risk of rising prices when it comes time to purchase semi-finished steel from a steel mill.
To limit the risk between purchasing semi-finished steel at a variable price and delivering processed steel at a fixed price, the steel service center can hedge their risk by buying Northern European Hot-Rolled Coil Steel futures. Should prices rise, the steel service center will make a positive return on the value of the futures contracts, which would offset the additional expense buying the physical steel.
If the price goes down, the service center will buy the semi-finished steel from the steel mill cheaper, which will offset the loss on the futures contract. Regardless of the direction of the price, the variable price risk is covered with a hedge using futures contracts, and the steel service center can deliver finished steel to the OEM at the promised fixed price six months after agreeing to a price.
It is important to note that by hedging, a company is trying to mitigate risk ‒ not make additional profit through speculation. Therefore, if properly hedged, adverse and favorable price fluctuations will net the same result.
Northern European Hot-Rolled Coil Steel futures are available to trade through your bank, broker, or electronically nearly 24 hours a day through CME Globex.
The future is unknown. Steel futures allow those involved in the purchase or sale of steel price protection to manage their risk.
