Producers and Futures

SBM Viewpoint

When market prices are high, steel futures contracts can provide the mill an opportunity to lock prices forward. While a fixed price physical contract can do the same, the guarantee of the price commitment is at times not the same.

The payment performance of steel futures contracts is guaranteed by the exchange clearing house (i.e. NYMEX) to each side of a futures contract transaction. The exchange mitigates the risk of payment by proactively marking forward positions to market and requiring that companies maintain adequate trading margins.

Mills can avoid offering fixed-priced customer contracts that become, in effect, "call options" in favor of the customer by requesting that customers use steel futures contracts to fix forward prices.

Since both the mill and customer can use steel futures contracts to lock forward steel prices independent of physical steel contract commitments, mill-customer relationships are expected to become stronger. This expectation is based upon the fact that reaching agreement on fixed prices in volatile priced steel markets is often a contentious issue. Since each party will be able to choose the timing and quantity of their forward price commitments using steel futures physical contract negotiations will not get bogged down with trying to convince each other that their view of the forward market is correct.