Managing uncertainty

As uncertainty and volatility in our market go up, ignoring them may work for a time, but ultimately precipitate business failure.

If you don’t ignore the problem, perhaps you respond to it with hand-to-mouth purchasing, physical stock holding or formula-based supply agreements.

However, managing cash is much easier and less expensive than managing the supply chain.

We just need to get paper contracts, and their market, right.

Example
A steel user needs to budget its cost now for delivery beyond the spot market.

Without a paper market, the user’s options are confined to the following:

Paper contracts offer a better solution:
Reframing
This logic applies to the whole supply chain.

For a liquid paper market to develop, we just need to reframe from entirely “physical” to “hybrid” thinking:

9
7

As a SteelHedge User, you may anonymously scan the market for hedging opportunities and customize paper contracts to suit your operational requirements.

The role of price indexes

Market price assessments researched by independent price reporting agencies provide a composite representation of decentralized commercial markets at a certain time, keeping price formation in the real economy (more info).

Actual Prices may differ from such Price Indexes because larger customers (orders) usually trade below the average market price while smaller customers (orders) usually trade above it.

What’s important for paper contracts is the correlation between Actual Prices and a selected Price Index, not their exact match. Over time, a 90-95% correlation between Actual Prices and Price Index (typical in SteelHedge Contracts) removes 90-95% of market risk.

There is no need to use Price Indexes in supply contracts. Your regular commercial terms may remain intact.

Reducing basis risk

Unless Price Index is used in a supply contract, there is basis risk that the change of your hedged (actual) price may differ from the change of Price Index. The higher they correlate, the lower such risk.

A 100% positive correlation between the hedged price and Price Index eliminates both market and basis risks. This may be unnecessary for hedging: removing 90-95% of market risk (typical in SteelHedge Contracts) is better than assuming it all unabated.

To reduce basis risk, you should use in SteelHedge Contracts Price Index providing the highest correlation with forthcoming purchases or sales.

To choose the best market reference for every hedging transaction, we help you analyze historical correlations with dozens of regional Price Indexes without disclosing sensitive commercial data.

SteelHedge contracts

Paper contracts developed by SteelHedge with our stakeholders provide several advantages for risk management:

b

Simplicity

3-5 variables (pricing reference, quantity, time period; plus optional pricing corridor and post-trade processing) are easier to manage than procurement, sales, logistics, financing, payments, claims, etc.

f

Flexibility

Pricing corridors and industry-wide indexing enable risk management across the ferrous value chain, from raw material purchasing to finished product sales, in line with regional specifics.

Security

A third-party protection against financial default guarantees performance and fosters healthier customer relationships.

Liquidity

The real-economy hedging market is far wider than anyone’s network of suppliers and customers.

Market prices and business circumstances change but simple rules of paper contracts stay constant.

The rise of financial speculation in commodity derivatives means that traditional paper markets may no longer serve our best interests.

The good news is that currently YOU may shape a next-generation trading venue and commercial hedging market entirely focused on YOUR needs.

Order a demo to experience it online.

SteelHedge Contracts
When compared to supply agreements, SteelHedge Contracts offer several benefits for price risk management: 

Simplicity

With only 3-5 variables (price index, quantity, time; plus optional pricing corridor and post-trade processing), they are easier to manage than procurement, production, logistics, financing, payments, claims, etc.

Flexibility

Pricing corridors and multiple data points help customize each contract to each hedger’s economic situation while keeping basis risk low.

Security

A third-party protection against contractual default brings certainty and fosters healthier customer relationships.

Liquidity

Your suppliers and customers may be uninterested in price risk management. A global hedging market is far wider than your regular supply chain.

Prices change but simple rules of paper contracts do not.

It is in best interests of steel market participants to develop a paper market entirely focused on their needs.

Now You may become a driving force in price risk management.

Pin It on Pinterest

Share This