STEEL FUTURES TRADING TRANSLATES
TO BIG SAVINGS FOR
If you spend any time watching the price of steel over an extended period, you’ll learn a few things. Worthington Industries has watched and studied the price of steel for over 60 years, and learned a lot. Today, we’re using that knowledge to benefit our business and customers better than ever by utilizing a structure and tools that allow us to offer customers a number of alternatives when it comes to price.
THE PRICE IS RIGHT
The one thing you can predict about the price of steel is that it’s unpredictable. Among other things, the raw materials that go into making steel impact its price. When the price of iron ore goes up, the price of steel follows, which then impacts the price of scrap. No matter where you are in the supply chain; mining, scrap yard, mill, service center, manufacturer, consumer, you’re impacted by the change in price. How much and how fast the price changes is what brings the most risk.
OFFERING A FIXED PRICE
In late 2007 to mid-2009, the steel market saw the fastest rise and fall of steel prices in its history. It was the type of environment where having excess inventory could make or break a company. In that volatile steel market, Worthington was looking for a way to better manage the price of steel for our customers. “We made the decision that we no longer wanted to get paid on the value of steel but on the processing of steel,” said Director of Price Risk Management Marc Gase. With this in mind, the goal was to find a way to lock in a fixed price for purchased raw steel and then offer a fixed price to our customers. So no matter what happened in the market, the business could gauge how much profit it would generate from a sale and our customers had that same guarantee.
In 2010, Worthington began offering a fixed price by using “commodity futures” or contract to buy or sell a predetermined amount of a commodity at a specific price on a specific date in the future. Up to that point there was a futures market for most raw materials, such as oil, aluminum, zinc, copper, iron ore, etc., but not for steel. The steel futures market was just developing, so the timing was right. That year, the Company made its first sale to a customer with pricing locked-in based on the futures market price.
TRADING IN ACTION
Here’s how it worked. Worthington had a customer who purchased 1.000 tons a month for 12 months at a fixed price. The Company signed a fixed-price contract with a “hedge provider” or bank for the same time-frame and value of the raw steel needed for the sale. The bank paid Worthington the market price for the raw steel and then Worthington in turn paid that same price to a steel mill.
The sale was a win/win. The customer was happy because they had a locked-in price and Worthington won because no matter how raw steel prices changed in the market, there was a guaranteed fixed margin on the deal. “This gave us a big advantage in the marketplace. Back then, we were the only supplier offering a fixed price,” said Gase. Today, Worthington offers customers more pricing options than ever and that first futures trade back in 2010 started it all.
HOW IT WORKS: OFFERING A FIXED PRICE
The customer agrees to purchase finished steel from Worthington Industries for a fixed price and amount.
GOING THE EXTRA MILE
Offering a fixed price is just one example of Worthington’s value added services. Customers also take advantage of metallurgical testing, scrap management and supply chain solutions. And, Worthington’s customers have access to the widest range of capabilities including pickling, cold rolling, galvanizing and configured blanking, providing unique solutions for every customer. Learn more here.