Now is a good time to consider the futures market, said Andre Marshall, president and founder of Crunch Risk, LLC, during Wednesday’s SMU Community Chat Webinar. Hedging price risk can help bring some certainty to the unpredictability brought on by the COVID-19 pandemic.
“Right now, the market is very bearish based on what we are seeing on the ground,” said Marshall. Lead times are short, supply lines are disrupted, scrap prices have plummeted and most businesses are at 70-some percent of prior levels.
For companies that have too much inventory and not enough orders, there are limits to what they can do. “But one thing is clear, you need to use all the tools available to manage your business. If you are not set up for futures, you should be. And if you are a speculator peering into the industry from the outside, we encourage you, because there is real liquidity in this space.”
Many people believe the futures market is a predictor of future prices, and that is not the case, said Marshall. “I can tell you there is almost no relationship between what the futures market is reflecting in its forward prices versus the actual eventual settlement of the contracts over time. The exception to that would be the first one to two months. Obviously, there is a closer relationship there, the closer you are to spot.”
Futures are financially settled contracts with no delivery of goods. They obligate a buyer to purchase a commodity or a seller to sell a commodity, such as steel or scrap, at a predetermined future date and price. What buyers should do is examine their needs, determine the prices that are available to them layering in an index contract and its discounts in conjunction with the price from the futures market, and then weigh whether it makes sense to lock in that price, said Marshall.
Lower steel prices do not equate to reduced trades or liquidity in the futures market, he added. Activity in the market is typically is a function of underlying fundamentals. “When there’s a big move in the market, you typically have more activity crop up, because all of a sudden there are new layers of interest in the market. It also may be caused by people who have been long on the market, thinking it was going higher, then deciding to get out of their position.”
To view a video recording of Marshall’s remarks in their entirety, click here.
The next SMU webinar will be held on Wednesday, July 22, at 11 A.M. Eastern Time and will feature John Packard, President and CEO of Steel Market Update. John will discuss the results of our latest flat rolled and plate market trends survey, our price indices and service center inventories/shipment data. This free webinar is open to anyone in the industry. Click here to register.
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