3/16/2012 — One of the interesting topics of discussion during the Platts/SBB North American Steel Conference was regarding the subject of Futures. A number of programs referenced HR Futures or Hedging strategies and not everyone was a supporter of the concept. This is nothing new to SMU as we have sat through many conferences and listened to CEO’s like Dan DiMicco (Nucor), Keith Busse (SDI) and others pooh-pooh the need to utilize the financial markets in order to hedge price risk and offer long-term solutions to their customers.
Over the past couple of years we are seeing the trend slowly changing and the amount of interest in the subject growing. The differences between the two ideologies was perhaps best represented in one panel which had Lourenco Goncalves of Metals USA sitting next to Jeremy Flack of Flack Steel.
Jeremy Flack spoke about the transition of the steel distribution segment of the industry. He pointed toward the growth in toll processing, changes in buyers’ attitudes and the growth of the Futures markets. He told those at the conference about Flack Steel, “On paper we look like a bank.”
He spoke about cash flowing in and out of the market as being a driver of steel prices. He explained their company is founded on the business model whereby they offer firm prices to their customers which is then controlled through hedging strategies.
Mr. Goncalves, who happened to be sitting next to Mr. Flack, when asked about the HR Futures markets and hedging strategies, told the group their company would not participate in the markets and he advised Metals USA customers to take any portion of their business they wished to hedge through the Futures markets to the competition.
Mr. Goncalves chided those supporting Futures and those suggesting it was gaining strength in the U.S. markets, “Do to the long time we have been talking about Futures we should by now be talking about the Present.” He went on to say, “I don’t plan on using it in the future.”
Mr. Flack told the group, “The attitude in our industry is there is going to be change – there is no going back….”
It will be interesting to watch the growth (or lack thereof) of companies like Flack Steel vs. old line service centers like Metals USA which are totally against using the financial derivatives markets as a way to work with customers who wish to have firm pricing for an extended period of time. Ultimately, the end users will decide who wins and who loses.