Predicting the unpredictable

The increasing uncertainty and volatility of steel markets make price risk management more essential than ever.

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 than managing the supply chain.

We just need to get paper contracts right.

Example
A steel user wants 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 third option:
Reframing
This logic applies to the whole value chain.

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

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On SteelHedge, the users may anonymously scan the market for hedging opportunities and conclude paper contracts that complement supply agreements.

Understanding 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 direct hedging 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.

Understanding 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.

Paper contracts

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

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

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.

f

Flexibility

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

Prices and circumstances change but simple rules of paper contracts stay constant.

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.

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.

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