Customers call for hedging solutions: Priefert

                        Apr 23, 2018 | 03:05 PM

                      By:  Grace Lavigne



                            NEW YORK — Recent volatility in the steel market has led more customers to ask for fixed prices, creating new opportunities for suppliers to take advantage of hedging solutions, according to Priefert Steel vice president of sales Chris Shipp.

Priefert Steel – a Mount Pleasant, Texas-based company that manufactures ranch equipment and provides steel processing and distribution services – started hedging via the futures market about three years ago under the guidance of Flack Global Metals.

Understanding the benefits and pitfalls of hedging can be challenging, especially at the onset, Shipp told American Metal Market, but noted that with continued assistance from Flack Global Metals, Priefert Steel has harnessed its hedging offerings to break into new industries, including the automotive and aeronautical sectors.

“The larger [original equipment manufacturers] are used to being provided with long-term pricing already,” he said. “If we wanted to compete in those business sectors then we had to evolve.”

Hedging via the hot-rolled coil futures market has allowed Priefert Steel to guarantee prices for its customers “beyond the typical 30-60 days,” Shipp said. “We learned quickly not to buy all of our steel up front from a capital perspective.”

Recent volatility in the steel industry – especially the Section 232 tariffs – has fueled an increase in the number of customers asking for fixed prices and for longer periods of time, he said.

“We get requests every week right now from customers who want to lock in prices for six to nine months,” Shipp said, noting that the norm would be considered 90 days.

Just a few years ago, virtually none of Priefert Steel’s customers requested hedging solutions. “Maybe they just weren’t our customers then,” he said, noting that the company has grown rapidly in recent years, having added three facilities in Texas, Arkansas and Idaho, as well as new equipment capabilities.

Approximately 5% of Priefert Steel’s customers currently take advantage of the company’s fixed-price offerings, Shipp said, but noted that he expects that number to rise to 15% by year-end.

“There are a number of opportunities in the works for this year,” he said. “Because of the volatility and rapid rise in prices, small and medium-sized businesses, in particular, with credit lines pushed to the limit – as well as heavy steel consumers – have come out of the woodwork looking for stability.”

American Metals Market’s hot-rolled coil index fell for a second week in a row on Thursday April 19, to $42.99 per hundredweight ($859.80 per ton). That’s down 0.1% from $43.04 per cwt previously but up 31.7% from $32.63 per cwt at the start of this year. The last time hot-rolled coil prices logged consecutive weekly declines was in October.

Market indicators are mixed, and while steel prices remain elevated some participants believe a peak has been reached. The CME Group’s US Midwest hot-rolled coil futures contracts were generally stable on Monday, with the July contract trading at $799 per ton ($39.95 per cwt) after settling at $800 per ton on Friday and the November contract trading at $752 per ton versus $750 per ton in the same comparison.

Priefert Steel recently decreased its exposure to steel imports for its supply needs following potential fallout from the Section 232 tariffs, Shipp said, noting that the company simultaneously increased its reliance on hedging.

“We’ve hedged more in the last nine months than all other times combined because of all of the uncertainty, and we wish we’d done more,” he said. “Obviously in a very unstable market, the more you can guarantee a gross margin on the buy side to protect yourself and lock in pricing on the sale side, it’s very advantageous." 

Too often procurement departments are neglected, Shipp said, pointing to a common industry-wide problem of staffing procurement departments with inexperienced workers.

“That lends itself to some of the struggles of understanding how protecting your risk can be valuable,” he said. “It’s very evident that there is a lack of knowledge about hedging in the industry, particularly at small- and medium-sized businesses.”

Common questions and answers about ferrous futures hedging include what hedging is and how it is useful, how futures contracts are settled and how the underlying indices are assessed, among others.

American Metal Market’s Midwest No. 1 busheling index underpins CME’s US Midwest busheling ferrous scrap futures contract, and American Metal Market’s Midwest shredded steel scrap index serves as the basis for the Nasdaq Futures Inc US Midwest shredded steel scrap futures contract. 

Grace Lavigne