What is steel hedging ?
Hedging of steel products allows the customer to offset the risk of price fluctuations in the physical market. This is achieved by securing a fixed price for the commodity in the steel futures market.
While the customer manages their production, or budget for a construction project, the period of the project may extend over 3, 6 or 12 months. Generally, steel mills work 1 or 2 months forward, a mill's selling price reflects the cost of the raw materials for the next month of production.
Therefore, customers have the option today of purchasing for stock, which creates a large burden on their finance, or using the steel future market for hedging their purchase.
SteelScope offers further insight into the risks associated with steel futures and how to correctly manage them. This includes Buyer risk, Timing risk, Forex risk, among others. We give clear projections of the profit and loss, descriptions of the risks and the mechanics of the hedging process so that it may be forecast and understood from a commercial and financial perspective.
Rebar Hedging Tool
The futures index calculates the forward price of the Rebar Index. It does this based on market trading activity, market confidence and new information.
The forward price curve is adjusted on a daily basis, so just as the physical market also changes daily the forward curve of the futures market changes.
The physical sale to the customer will include other costs: transport, fabrication, finance, etc.
For this example to be clear we are only consdiering the profit margin which allows the trade to be successul. This margin is realised when the physical sale is hedged against the paper purchase (index hedge).
Just as the physical sale is contracted for delivery in 6/12 months, the index hedge is also contracted for the month when production is required - in the future, and according to the forward curve.
There are risks to consider as mentioned above, but as with any business these risks can be managed.
Rising or Falling ?
| Month | Index Hedge | Physical Steel | ||
|---|---|---|---|---|
| Today | BUY | SELL | ||
| Month 2 |  |
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| Month 3 | |
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| Month 4 | SELL | BUY | ||
| Month 5 | |
Rebar Delivery | ||
| Month 6 | |
Rebar Fabrication |