Erdemir Group, Turkey's biggest steelmaker, has begun to hedge iron ore prices using derivatives, something the company sees as vital against the backdrop of a prolonged period of depressed steel prices, a company official said Monday.
The upcoming introduction of tools to hedge output price risks would fill a missing piece in the puzzle, Erdemir's purchasing coordinator Sevkinaz Alemdar told the LME Metals Seminar.
"We are taking baby steps; getting ready to cope with it," she said, referring to the company's foray into iron ore hedging. "We have complaints [about indexes] but use it because it's the best solution available."
Alemdar, whose company is chiefly a producer of flat products, also said that Erdemir was looking for a viable scrap contract to serve its input hedging needs.
On metallurgical coal, which Erdemir sources increasingly from Australia as well as the US and Colombia, Alemdar said pricing was more "specific," and that she had some "doubts" on the use of hedging tools for now.
"Before, we didn't participate because we didn't need to. Now it's a matter of survival, which will create the [liquidity]." Erdemir has an interest in accurately measuring commodity price positions as it actively buys raw materials against steel sales, amid a lean operating profile and low inventories, Alemdar said.
STEEL HOPES ABOUND
Steel pricing, much of which is not index-linked unlike iron ore and coking coal, may go the way of the raw materials, although it is key that index providers earn the trust of physical market participants, other speakers on the panel with Alemdar said.
Abe Ulusal, futures broker at Mitsui Bussan Commodities, said many steel companies are already familiar with hedging through the use of derivatives for zinc by galvanized steelmakers, nickel for stainless producers and for coal, electricity, emissions and foreign exchange.
Drawing parallels with how the aluminum industry came to start hedging, Michael Lion, a consultant to scrap trader Sims Metal Management, said it was key to "gain on our side the producers in the steel industry."
