Hedging or price risk management

Protection against price movements

Hedging is the process of offsetting the risk of price movements in the physical market by locking in a price for the same underlying commodity in the futures market. In hedging, an organisation is able to lock in an acceptable forward price.

This may mean forgoing windfall profits, but it protects against any windfall losses and enables it to decide on the amount of risk it is prepared to accept.

Hedging is a parallel activity to the physical purchase or sale of material, the on-exchange activity does not replace the normal industry channels for the purchase and sale of steel. In the vast majority of cases it is used simply as a financial tool to manage price volatility experienced in the physical market.

For hedging to be successful, however, all pricing within the supply chain should be undertaken basis the LME price. This will achieve the most efficient hedge and support the requirements for hedge accounting standards.