Traders and Futures

SBM Viewpoint

The biggest fear for steel distributors and steel traders, due to market price volatility, is devaluation of inventory.

Steel futures contracts will allow steel distributors and steel traders to fix the forward value of their inventory. This practice should allow more discipline in the adjustment of inventory and may result in less spot market price volatility from distressed inventory reductions. The resulting cash flow from steel futures contracts in a declining price market will reduce the need for inventory to be converted into operating capital. Less inventory liquidation in a declining market should have less negative impact on market prices.

Reductions in overall market price volatility and improvements in individual company inventory price performance should allow financial institutions to lower financing costs for steel inventories. Banks will be able to reduce premiums they charge as inventory valuations are proven to more stable as a result of more rationale market behavior and the use of price risk tools such as steel futures contracts.