When it comes to risk tolerance how you approach the subject can vary fairly dramatically. A manufacturing company with a price list which remains constant (retail market) has a different vantage point than say a metal building or construction related company who is bidding on future business based on the information available to them on any given day.

During our Hedging Price Risk workshop which we held in Houston last Thursday, the attendees were all manufacturing companies and we had that dynamic where one was more of a retail driven operation and the second had multiple operations with one being to quote on future industrial construction applications.

Andre Marshall, CEO of Crunch Risk and our main instructor for the workshop has a knack for sizing up different kinds of companies and making suggestions as to what derivative product works best to meet the company’s financial goals. Hedging price risk is not a single focused subject matter and one of our attendees was the CEO and owner of the family business which had been in operation for a number of generations and we could see as each strategy was presented a light clicking on as he associated the strategy to their specific business.

Hedging strategies can vary even within a single company as Futures and Options can be used in differing ways. For example, Andre pointed out the average hot rolled price for 2010 was around $713 per ton if buyers were active in the market throughout the year. Many of the analysts currently have HR pegged to average around $700 per ton or higher for the year 2012. At this time, HR futures can be purchased around $675 per ton at the far end of the curve (June through December 2012) according to the CME Group Forward Curve. This is well below the $743 per ton averaged during 2012 according to our SMU monthly averages.

However, much like the steel business it’s not what you see on the screen it’s what is truly available in the marketplace that is critically important to service centers and end users thinking about accessing the Futures markets. It is important to have an active broker like our instructor who is in contact with both buyers and sellers each and every day to understand who is willing to make a deal at numbers off the screen. In other words just because $675 may be the number on the screen there may be a buyer or seller out there willing to move that number one direction or the other at any point in time.

SMU continues to believe every company in the flat rolled steel business buying and selling (or manufacturing) hot rolled, cold rolled, galvanized or Galvalume products in significant volumes (hundreds of tons per month) need to be aware of how the Futures markets work and how they can assist – or hurt – your company.

Our next Hedging Price Risk workshop will be held on April 11th in Chicago, Illinois at the Chicago Board of Trade (CME Group). Part of our Chicago program will be a tour of the CME Group trading floor. More information and registration can be found on our website: www.SteelMarketUpdate.com in the Events section of the site. Early bird registration is now available and SMU member companies also receive a discount when registering for this or any other SMU sponsored workshop or conference.

If you have any questions, please call 1.800.432.3475 or email info@steelmarketupdate.com