Market Data
January 26, 2014
Steel Buyers Basics: Managing Price Risk by the Use of a Hedge
Written by Mario Briccetti
The most straightforward way for a flat rolled steel buyer to fix the cost of steel out into the future is to simply buy steel now and hold it in inventory. The downside to this strategy is, of course, the inventory holding cost.
A second way to fix the price of steel is to negotiate a long-term fixed price deal with your supplier. Two problems occur with this approach, first suppliers don’t always honor these deals if the marketplace changes abruptly. Any of you who lived through 2004 and 2008 steel markets experienced this (to be really fair sometimes customers don’t honor the deals either). Second, suppliers normally get a price premium for a long-term deal and will demand a fixed quantity buy.
