London: Small and medium-sized steel producers are increasingly looking to derivatives trade to lock in profit and cut risk as they contend with meagre margins, shifting economic trends and volatile raw materials prices. But more participation by major steelmakers is required to make hedging effective.
"Steelmakers are more exposed to the impact of international trade than ever before," said Matthew De Morgan, chief executive of Swiss trader and producer Duferco. "The more successful of these steel companies are now employing very similar management tools to the traders. This is frankly essential to manage unique commercial risks and maximise margin."
Steelmakers have traditionally been reluctant to join the exchange-traded world on worries that exchanges will offer easy entry points to investors, who will in turn drive up and distort prices and the cost of doing business. But in the wake of the global credit crunch, mills are looking for new tools as their margins have been squeezed by overcapacity as well as sluggish demand from the West, while input costs have risen and fallen.
"Mills have joined the rest of the supply chain in the need to manage price risk of raw materials," said Patrick McCormick, president of WSEM, a unit of information provider World Steel Dynamics.
At least five exchanges trade steel contracts, and new services for clearing over-the-counter iron ore swaps have sprung up in Europe as well as Asia as the industry moves closer to market-based pricing.
