Risk Management Strategies for the Metals Industry

Logan Davis, Vice President of Business Development at Commodity & Ingredient Hedging, talks with Modern Metals about risk management strategies for the metals industry.

Q: CIH has been in the risk management industry for 25 years, but the metals service is relatively new. What types of companies do you work with?

A: We work with all types of companies in the metals space, from recyclers to service centers, OEMs, contractors and everything in between. Our team of developers have built tools to service over 700 clients across 14 different industries. The robust experience we have in helping companies manage their risk helps us to identify where it exists and build a bespoke hedge program alongside our clients that measures up to their needs and business objectives.

Q: How can you provide guidance to such a wide array of businesses?

A: While there are nuances, guidance is about understanding an industry or company’s needs. Is it risk to the upside, downside or both? Is there a lead time component that needs to be considered? Is the format of the product referencing exchange prices, or do we need to measure correlations?

From there, we can leverage the tools we’ve built to help identify the risk properly in the right time frame. If our current technology doesn’t address their needs, we can look at building new tech to support our clients, but understanding the risk is the foundation of being able to help them.

Q: Does it take quite a bit of time to learn about so many businesses?

A: It can, but it really depends on the business. As a company, we’re fortunate to have 25 years of seeing different scenarios; however, individual experiences also play a role in understanding an operation.

A prospect generally wants a solution to a particular problem they are experiencing, which really starts the process. We often enter mutual confidentiality agreements with prospects to get a look at their purchases, inventory and forward sales data to help build a risk profile. (Check out Dustin Baker’s column, which discusses the daily position report, in the February 2024 edition of Modern Metals.) Once we can measure the risk, we start to work on solving problems and managing commodity exposure. Through all of this, we also learn what type of risk appetite the prospect or client has. Sometimes clients want protection on all their risk; others choose to be more selective in when they have strong coverage and when they want to be more risk-taking.

Q: Can you provide some examples of different ways clients will manage their risk?

A: With the market falling over the last few months, steel prices are close to three-year lows. One of our clients saw how the price compared to history in our platform and thought it was a good opportunity to start building inventory at the lower prices. They aren’t quite sure when the turn they hope to see will happen. Without hedging, they wouldn’t be able to step into the decision like they have. Our website helps them measure their physical risk and allows them to offset any risk they aren’t comfortable with, fine-tuning their exposure to match their appetite. They’ve been managing the positions and will plan to remove hedges as they become more bullish. The information in the website helps them figure out when the time is right, some of it is public data, other things are specific to their operation.

Another one I like to mention is our clients that were struggling to hedge the different forms of metal they processed. Often these are OEMs who deal with wire or pipe and tube. Our platform allows them to measure the relationship of their specific product prices with CME prices. Once they had that, they were able to see their physical risk across all their products in exchange terms, meaning a million feet of wire or tube is boiled down to contracts worth of copper, steel or aluminum. That clarity and visibility allowed them to upload their inventory each week and manage the net risk they were exposed to—based on their current product mix. Having the ability to simplify the risk of multiple products and lay it out in English is something a lot of our customers really need to even attempt managing their risk. It really comes down to understanding the business model and accurately measuring the risk as it changes from day to day or week to week.

Contact Logan here to learn about opportunities in Metals Price Management for your operation.