Whirlpool Starts Hedging Steel

Whirlpool Corp. has added steel to the list of metals being hedged as part of its production materials sourcing program. The world's largest appliance maker has joined other large-tonnage users, such as General Motor Corp. and Ford Motor Co., in buying futures on commodity exchanges to hedge against volatility in prices. They remain the exception, however, since the latest Purchasing survey of metals-buying groups finds a minority (31%) involved in steel, nonferrous or precious metals hedging

Abrupt changes in prices tend to buffet metals-commodity buying with some regularity so that purchasing and supply chain management personnel at end-use firms often are faced with price-risk volatility. However, the latest e-mail poll reinforces findings in previous surveys as far back as 2005 which have shown that speculators, pension fund managers, producers, processors and traders are the most active users of futures to hedge metals traded on the New York and London commodity exchanges.

Large buyers of steel typically buy steel on long-term contracts in an attempt to keep prices stable. At Whirlpool, steel is one of its biggest purchases so it has agreements within certain price ranges, CEO Jeff Fettig tells Dow Jones Newswires , "so I think our steel is pretty predictable." Still, Carlos Barajas, global commodity director at global steel procurement headquarters in St. Joseph, Mo., tells Purchasing the white goods maker has started hedging the buy by using the futures contract for hot-rolled steel coil on the New York Mercantile Exchange (Nymex).

But, like the company's hedging of nonferrous metals such as copper, aluminum and zinc on commodity exchanges, the exercise is handled not by procurement but by the company's risk management group. Barajas emphasizes that hedging is part of a revised overall procurement strategy developed by the company's purchasing and finance executives.

Hedging is a venerable mercantile strategy. The London Metal Exchange is the world's oldest non-ferrous metals market. Founded in 1877, the LME traces its origins back to 1571 and the opening of copper trading on the former Royal Exchange. Futures traded on the LME and CME Group's operations in Chicago since 1848 and New York since 1882 allow metals producers and buyers to hedge against volatility in prices.

Futures trading proponents say the use of a single price benchmark with multiple delivery options offers the futures buyers the best flexibility in managing price risk by either buying and selling the warrants or accepting delivery of physical metals from regional warehouses. This has worked well in hedging gold, silver, platinum group metals, copper, aluminum, lead, zinc, nickel, tin and uranium—with cobalt and molybdenum about to join the list. Steel trading has been a bit of a bust, however.

With many steel producers still opposed to hedging of their products on commodity exchanges, however, most of this production metal still is sold directly to customers by the mills or through such middlemen as metal service centers. The Nymex steel futures program still is seeking its footing with some producers and buyers unhappy with the price-setting mechanisms in place. Also, the LME this spring is merging its existing Mediterranean and Far East steel billet contracts into a single global contract.

Speculators like hedging of base metals prices that lately elevated in an apparent disconnect from supply/demand fundamentals, writes analyst Scott Wright at financial-services company Zeal LLC. "Investment demand will continue to rise as more and more folks hedge their exposure to fading currencies," he says. "This will be done not only physically, but via exchange-traded funds," the ETF investment vehicles that are spreading across the precious and nonferrous metals complexes.

However, buyers aren't convinced that futures trading is a viable purchasing option. An irrigation equipment manufacturer in Nebraska doesn't hedge directly on any existing metals exchanges—"due to the conservative nature of our management style and accounting"—but does hedge indirectly through some suppliers of processed materials, says the director of materials management. "This typically shows up as a forward commitment for processed materials at a more stable or fixed forward price."

This actually is a more popular approach than hedging or futures trading for numerous small-to-medium-sized manufacturing companies, according to the Purchasing survey. The purchasing manager of a power cable manufacturing plant in Michigan "doesn't hedge metals because he isn't buying primary metals." His materials buy is mostly metal parts so he lets his suppliers control the cost of sheet coils and bar material within agreed-upon price parameters.

The purchasing manager at a contract manufacturing operation based in Pennsylvania says the metal stamping company's purchasing and finance organizations jointly hedge copper on the New York Commodity Exchange (Comex)—but only periodically and only with permission from the affected customer. "We cannot hedge without mutual agreement with our customer and few choose to do so," he says.

The purchasing director of a manufacturer of store fixtures in Nebraska says "everyone is after cost savings in this very competitive market" so he has been known to hedge on direct materials buys—"when it looks to help give us a cost advantage for our customers." However, he adds that "we don't do it with futures, we do it with the physical material." He also points out that "we don't do it very often, due to the risk in this very unpredictable market. We weigh the risk versus rewards and make decisions that help us give savings to our customers."

The purchasing manager of a lighting fixtures producer in Illinois reviews the metals markets periodically "to see if it makes sense to hedge or not; that is, will hedging stabilize prices enough so we can better manage the business." He says that the firm last year hedged aluminum used in die castings and extrusions to stabilize prices that ranged on the exchanges from 60¢ to 99¢ for primary ingot and from 44¢ to 92¢ for secondary material. This year, prices are averaging 97¢ for primary and 91¢ for secondary aluminum, but hedging is on hold "since we feel demand isn't there so we will wait and hope it drops to the mid 90s."

Interestingly, several buyers agree that the service centers "don't want to play unless purchasing organization will accept an annual program based on prices charted monthly by a market consultant that is, basically, the average price of the previous three months plus processing adders.

"Since the adders can be as high as a 20% mark up over spot, it's not a deal at the current market outlook," says the purchasing manager. "On the other hand, some service centers have agreed to lock in flat-rolled prices for three months at a time, an approach several buying groups are taking. As for stainless steel, with demand still depressed "nobody wants to hedge or lock in for three months," notes the purchasing manager. "Basically, the reason for that is that no one carries that much inventory anymore."

Source : https://insurancenewsnet.com/oarticle/Whirlpool-starts-hedging-steel-a-170904

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